I received an email from David Cameron this week (I suspect it was a round robin). He wanted to tell me about Barry and Samantha, who sound like a nice couple. They have “worked hard, earned a decent salary and could afford monthly mortgage payments but not the deposit needed to buy a home of their own”.
So Mr Cameron has arranged for you and me to help them out: the state introduced Help to Buy “to help hardworking families like them get on the housing market”.
You can see why the prime minister might have chosen this moment to remind us all of the help the taxpayer, via the state, gives to some of the young.
Over the past week the idea of intergenerational warfare has made a splash in the press. The Financial Times produced numbers showing that while the average 20-something has seen their relative living standards slip nastily in the UK over the last 35 years, those of pensioners have risen substantially.
The Institute for Fiscal Studies followed up this week with claims that the only age group to have seen a rise in their real incomes since the financial crisis was the over-60s. The English Housing Survey offered fertile ground for those convinced that the world had been unfair to the young: ten years ago around two-thirds of 25- to 34-year-olds owned their own home. Now just 36% do.
So what’s going on here? We need to split the idea of a pensioner paradise in two: wealth and income. In a normalish world, pensioners should have much higher levels of wealth than other people — after all, they should have been accumulating assets with their spare income throughout their working life and using their retirements to ‘decumulate’ those assets.
That’s clearly the case now: a study by Prudential last year suggested that while 9% of total UK households are worth over £1m, 11% of pensioner households are worth over £1m.
But it is more the case than it would be in normal times, because the gradual fall in interest rates since the 1980s has provided a wonderful background for those of asset-gathering age. It has caused the fabulous bond bull market; kept the equity markets moving; and of course given us the UK’s stunning house-price boom (prices are still on average way above historic norms). That’s all made our pensioners rather richer — for now — than you would normally expect.
What isn’t remotely normal is that pensioners should be in the highest income quintiles. Economies make most sense when income flows more to the productive than the unproductive, and that clearly isn’t quite working today.
So why are pensioners so high up the income scale today? A quick delve into a few reports from the Office for National Statistics (ONS) will give you the answer. It is about income from their assets, of course, and about the final salary pensions the young will never see. But it is also about the madness of our financial redistribution system.
An ONS report from 2012 made the point that the average disposable income of a retired household rose two and a half times from 1977 to 2011 — rising in real terms almost every year, regardless of economic conditions. During that period, the incomes of working households rose and fell with economic growth. About half of the rise in pensioner income was down to a rise in income from private pension schemes. But the rest was a result of rising income from “the state pension and other cash benefits”.
Another report out last year quantified this. The average income for a retired household before adding in cash benefits from the taxpayer was just under £11,000. The benefits added up to another £10,882 for a total of £21,812. Cash benefits as a percentage of income? 50%. It surprised me too.
And this isn’t just about generous benefits at the bottom dragging up the average: the top quintile of retired income receivers (on £42,000) still got 26% of their income from the state. The average pensioner also received benefit in kind of £5,700 from the NHS each year.
So there you have it. Today’s pensioners are, in the main, a financially lucky generation. Governments desperate for growth in a fundamentally deflationary environment have given them the low interest rates that have made them asset rich. Those same governments, desperate for votes, have given them the benefits that make them cash rich — benefits our overstretched state clearly can’t afford in an ageing society.
So what next? If a government really wanted to have a go at making things better, that wouldn’t be too hard (as long as they didn’t want another term). The benefits could go: if we reserved welfare for those who actually need welfare, we might not have quite the debt problem we do.
Then they could think about ending their support for the housing market.
This brings me to a recent note from Canada Life. It points out that, in the past, the “mantra for successful investment outcomes” was “diversification, diversification, diversification”.
That meant dividing your assets up among the various classes in relatively standard ways: the average split gives 40% or so to equities, the same to bonds of one type or another and the rest to cash and alternatives. But given how much risk you have to take to get what we used to think of as a reasonable return in today’s remarkably iffy financial world, this doesn’t really hack it any more.
Instead, we should divide our assets up not by their type, but by the type of risk they represent. Canada Life reckons there are four major risks to a portfolio: inflation risk; interest rate risk; credit risk; and equity risk. Think about that for a minute, though, and you will see that the first two are more or less the same thing.
It is a reminder that the main risk to all assets is that of rising interest rates: when this long cycle of falling rates finally turns, so will the bull markets they have supported, particularly those in the bond and housing markets.
Most of us should be all for this. Fast falling house prices should make no difference whatsoever to the quality of life of the retired (if you aren’t selling or you’re selling to buy another house, who cares if the price of a house falls?), but it would make a huge difference to those looking to buy houses, something that would balance out the assets of the generations a little.
It would also be a hell of a lot easier than expecting the few productive taxpayers left in the UK to help finance a new house for every Barry and Samantha in the country.
• This article was first published in the Financial Times.