Britain is very good at generating wealth. So much so that it’s now worth upwards of £11 trillion – or more than six times our national income. But we are awful at sharing it out: one in 10 adults own half the nation’s wealth. If not addressed, this could have disastrous consequences for the living standards of young people in particular.
The first problem is the knowledge gap: while income levels are easily understood and (reasonably) easily dealt with through income tax, when it comes to wealth, and particularly comparing inequality across generations, we’re barely on the starting blocks of understanding the problem, let alone what to do about it. The combination of it being poorly understood, enormous in scale and fiendishly difficult to tackle means that for the last 30 years, politicians have simply ignored it. That approach cannot continue.
So here are some numbers: of Britain’s record £11.1 trillion of wealth holdings, private pensions are the biggest single element at £4.5trillion, followed by property (£3.9tn) and financial wealth (£1.6tn). The top 1% of the population now owns 14% of all UK wealth, while the bottom 15% have zero wealth or are in debt.
Wealth is accumulated over the course of people’s working lives, of course, generally peaking just before retirement when people start drawing it down. But many younger people are now struggling to accumulate wealth in the same way older generations did. Anaemic earnings growth, lower rates of home ownership and missing the boat on generous defined benefit pension schemes are all still acting as headwinds nearly a decade after the financial crisis began.
To properly test whether generational progress has been thrown off course by these trends, however, it’s no use measuring the wealth of someone in their twenties today against a person in their sixties. Much more instructive is a comparison of people born in different years when they were the same age.
The findings of a new Resolution Foundation report are not promising. At age 30, a typical UK-based adult born between 1981 and 1985 had just half as much total net wealth as someone born five years earlier at the same age.
For this group, the short-term drivers are clear: entering the world of work during a recession, particularly one in which wage falls were so steep, is likely to have held back pay growth and their ability to save. Five years can make all the difference when it comes to finding a home that you can afford to buy.
But this trend of younger groups faring worse than the cohort before them extends well beyond these “unlucky millennials”. Generation X – those born from the mid-60s and through the 70s – have fallen behind their predecessors too, with this reversal stretching as far as back as the late 1950s. When it comes to wealth, those born in the decade after the war have done best of all.
To help younger generations catch up, we need to understand what’s driven wealth growth over the past couple of decades. For the most part, rising property wealth wasn’t driven by people moving into bigger homes, paying down more debt or adding an extension. The luck of owning a house at the right time was far more important, accounting for four-fifths of the increase.
The post-war baby boomers did best from the property boom of the 1990s and early 2000s, scooping an £80,000 wealth windfall over and above what they earned from moving homes or paying down mortgages. In comparison, those born later, in the 1970s, got a £35,000 windfall. Unlucky timing meant they typically weren’t old enough to catch all of the boom years.
While Britain’s ongoing failure to build homes means we’ll likely see property price booms again in the future, it’s unlikely we’ll ever see one as widely shared as the that if the 90s and 2000s, given how home ownership rates have fallen since then
It’s not all bad news for the younger non-property owners among us. The introduction of auto-enrolment, making pension saving the norm unless you opt out, means nearly eight million workers are now putting something away for retirement through these schemes.
This is one area where younger cohorts appear to be roughly matching those who went before – and with the roots of auto-enrolment dating all the way back to a Green Paper in 2002, it’s a success story built around party political consensus, as well as the support of unions and business.
However, there are big question-marks over the extent to which the rapid growth in pension wealth that people in their 50s and 60s enjoyed over the last decade will be replicated. Two of the factors that have driven up the value of pensions recently have been rising longevity and falling interest rates – gains that are mainly down to luck, and unrepeatable luck at that. (And as with housing, even if such patterns are repeated, young people will see less of the gains because fewer of them are members of defined benefit schemes.)
So what’s to be done? On property wealth, we need to build more homes and get home ownership rising again, if we want it to be the great force for driving down inequality that it once was. All political parties say they want to do this – but no government has built a million homes over a parliament since the Thatcher/Major term a quarter of a century ago.
On pensions, encouraging workers to set aside more of their wages is hugely important. But with pay packets flatlining or even shrinking, this is a huge challenge – especially when those wages are also being used to pay off student loans and save for a housing deposit.
To really address Britain’s ingrained levels of inequality, it’s time to think what we should do with the record wealth that is still held in relatively few hands. For despite its growth having outpaced that of our economy, the extent to which we tax wealth has barely changed since the 1960s.
There are reasons for this. Taxing wealth is often practically difficult, which hardly recommends it to politicians. But now more than ever we need to look again at the balance of tax between income, consumption and wealth. That should include weighing whether thecurrent capital gains tax system is fit for purpose, and if further inheritance tax cuts are really the best use of current resources. These are big questions that the Resolution Foundation’s Intergenerational Commission is currently exploring.
As pressure on public services and finances rise with our ageing society, government can hardly ignore the fact that those cohorts that benefited most from the huge expansion of wealth over the past few decades are the same ones approaching retirement and requiring more from the health and social care system. But as the Conservative Party’s difficulties with their proposed “dementia tax” showed, these ideas need to be debated and assessed first, rather than being thrown at people mid-election campaign.
This broad, intergenerational view should not mean we overlook the many older people who aren’t wealthy: the poorest quarter of those born in the 1950s have virtually no savings or are in debt. But there is a risk that the property and pension windfalls of the wealthier baby boomers could entrench those inequalities within younger generations, if inheritances increasingly determine your odds of buying a house.
What’s certain is that we cannot continue to ignore the huge role played by wealth in today’s levels of inequality. Trying to reassure ourselves that these are only passing worries could mean today’s problems grow into chronic concerns.
This post originally appeared on The Guardian