This is the Resolution Foundation’s fourth report for the Intergenerational Commission, which over the course of 2017 will examine issues of intergenerational fairness and make recommendations to strengthen the intergenerational social contract. This paper, building on previous work on the earnings of different generations, examines household income. Specifically, it looks both at changes in income and changes in inequalities between and within different generations.
Over the course of the 20th Century, years of economic growth and rising living standards meant that we came to take for granted that the income of each generation would be higher than its predecessor. For example, average baby boomer incomes at age 55 were £10,000 higher than among members of the silent generation at the same age. Average silent generation incomes were in turn £6,000 higher at age 55 than those recorded by the greatest generation. Both equate to generation-on-generation income growth rates of around 50 per cent. Improvements of a similar scale were evident among members of generation X at younger ages. This pattern of has been a key measure of our progress as a nation.
However, this generation-on-generation progress appears to have stalled in the 21st Century. Members of the youngest of the generations to have reached adulthood – millennials – have not to date secured incomes that are any higher than those of generation X at the same ages. In part, of course, this reflects the impact of the financial crisis – incomes have suffered across all generations in the last decade. But if current economic forecasts turn out to be right, and government policy remains unchanged, then the outlook for the group looks little better. By 2020-21, many millennial households will have reached their mid-30s and yet might still be no better off than members of generation X were at the same age.
With millennials struggling not just in the labour market but also in relation to asset building – particularly in terms of housing – there is a growing sense that the current generation of young adults is facing a new set of living standards challenges which require fresh thinking if the generational progress that once seemed inevitable is to be restarted.
These new concerns about the prospects for younger generations sit alongside a much more well-trodden debate about unfairness within generations. While inter– and intra-generational equity are different concepts, they are nevertheless intertwined.
For example, some intra-generational inequality might be considered palatable if the generation as a whole is securing significant living standards gains relative to those who came before. In marked contrast, the current stalling of generational progress is likely to mean that any given level of inequality is harder to take. Changes in inequality also affect which parts of any given generation see living standards progress compared to their predecessors. Likewise, we should be concerned that inequalities within older generations (in relation to home ownership, for example) might amplify future inequalities in a younger generation that may not enjoy the same opportunities (with only those millennials able to access the bank of mum and dad or receive large inheritances being able to ever become property owners, perhaps).
In this note we show that all generations have significant within-generation inequality. But generation X has the dubious honour of being the most unequal to date. This reflects the arrival of its members into adulthood from the late-1980s onwards, the precise point at which overall income inequality in the economy was reaching new heights. Earlier generations recorded increases in inequality at the same time, but from lower bases; members of generation X simply started out in a world that was more unequal than the one their parents and grandparents faced.
In contrast, millennials reached adulthood as the financial crisis hit, sparking a modest reduction in – still very high – levels of economy-wide inequality. High levels of employment and minimum wage policies have provided more protection for poorer millennials than might have been in place in previous decades; while the generalised slowdown in pay growth in the post-crisis period has stymied opportunities for richer millennials to open up the same scale of earnings gap as their predecessors did.
But millennials are potentially suffering from smaller, generationally-specific, trends. Most notably, stark differences in housing costs between renters and owners mean that declining levels of home ownership within the younger generation is pressing upward on inequality. This housing divide is less marked for older generations, though clearly not all older households are asset-rich. Around 30 per cent of baby boomer families do not own their own home for instance, while 16 per cent of those aged 55-64 have no private pension provision.
What the inequality picture looks like for millennials when they approach retirement will depend both on the opportunities they have to accumulate assets over the course of their working lives and on the way in which the unevenly-held wealth of older generations cascades down. Ensuring that we develop clear strategies on both of these issues – rather than simply leaving it to chance – will be a key undertaking of the Intergenerational Commission.
Much of the popular debate about intergenerational living standards is couched not in terms of generations, but instead by contrasting the fortunes of the pensioner population with those of working-age households.
This is perhaps unsurprising given the remarkable reversal of position between these two groups in recent years: median pensioner income has been playing catch up with non-pensioner incomes for many years and, from 2011-12 onwards, the living standards of the typical pensioner after housing costs have actually been higher than those of the typical non-pensioner. Having been £70 a week lower than typical working-age incomes in 2001-02, typical pensioner households now have incomes that are £20 a week higher than their working-age counterparts.
To some extent this distinction fuels the unhelpful perception of a zero-sum ‘generational war’, in which the flat or falling incomes faced by many working-age households are viewed as being the direct product of the gains made by individual pensioners. This is clearly wrong, not least because the very welcome improvements in headline pensioner incomes of recent years do not track income growth for individual pensioner households from year to year. Instead, each year new individuals reach pension age (usually with higher incomes than the average existing pensioner) while others of course die (usually with lower than average incomes). The composition of the pensioner group therefore changes relatively quickly, and this can have a significant feed through to headline income levels even as individual pensioner incomes remain relatively unchanged from year to year through retirement. We find that if we follow birth year cohorts (for example, everyone born in 1935) from year to year, we do not see the high income growth that is true of typical incomes – which compare ever-changing populations of pensioners each year.
Nevertheless, it remains the case that pensioners have fared much better overall than working-age households have in recent years. From a public policy perspective it is vital that we understand what has driven this divergence. By doing so, we can be better equipped to ensure we can simultaneously build on the successes made in relation to recent cohorts of pensioners; identify where more might be done to ensure a more even sharing of gains across members of the pensioner population; and tackle the challenges facing younger groups. In doing this, we can ensure that future generations can continue to look forward to higher living standards in older age than their predecessors enjoyed.
Importantly, our research shows that more recent cohorts of pensioners have higher incomes not just because of general income growth over time, but also because they are now far more likely to be in work or to have a partner in work (either as employees or on a self-employed basis). In fact, almost one in five pensioner families now live in a working household – a figure that rose dramatically in the 2000s until the financial crisis. Of the 31 per cent rise in typical gross pensioner incomes (before housing costs) that occurred between 2001-02 and 2014-15, approaching one-quarter was the product of increased income from employment. Going forward, it is important that we continue to encourage, incentivise and support older working.
But clearly savings matter too. Increases in private pension and investment income accounted for around half of the 31 per cent increase noted above. The closure of generous defined benefit occupational pension schemes to younger workers mean that future gains of this scale are more questionable unless we take further action – particularly against a backdrop of the recent lost decade (or longer) on pay growth.
The remainder of the 31 per cent increase in pensioner incomes between 2001-02 and 2014-15 was derived from growth in public benefits – largely before the introduction of the state pension ‘triple lock’ – with this source proving an especially major driver of improvements at the lower end of the pensioner income scale. As our population ages, balancing the crucial role played by the state in retirement – especially in relation to lower income households – with fiscal sustainability will be an important consideration in the coming years.
Forthcoming reports for the Intergenerational Commission will look at each of these issues in considerably more detail. What’s already clear is that the context within which policies related to living standards are made is changing significantly in the UK, knocking down many long-standing assumptions as it does so.
Significant rises in pensioner incomes compared to those of the working-age population are transforming the picture of who lives on low incomes in 21st Century Britain, even though the lived experience of individual pensioner households is more complex than a simple focus on strong headline income growth measures might suggest. And from a generational perspective, the apparent stalling of living standards progress for millennials remains a major challenge to our shared sense of what national progress in Britain looks like. The Intergenerational Commission is investigating and working within this changed context in order to strengthen the country’s intergenerational contract.