Age concern – the Liberal Democrats and generational equity

I wrote this article in Summer 2006 for Liberalism – something to shout about, published by Graham Watson MEP and edited by Simon Titley. I’m taking the liberty of republishing it here, but if you want to read the other articles – by Graham, Simon, Ros Scott, Jonathan Calder and Simon Bryceson, follow the above link for an order form.

Any article on this topic will inevitably date quickly, so please bear that in mind. In particular, “Hands off our future” is a reference to an abortive attempt of mine to set up a campaign website on the topic which in the end I didn’t have the time to keep going.

Demographic change is creating a dangerous situation, one where younger generations are suffering increasing economic injustice. A system of ‘neo-feudalism’ will emerge unless radical steps are taken. Do the Liberal Democrats have the courage to campaign for justice – or will they miss the boat?

Introduction
There’s no easy way to put this, and I can almost hear the shrieks of outrage as I type, but young people are being expected to shoulder too much of the UK economy while older people are getting away with shouldering too little.

That isn’t to say that pensioner poverty doesn’t exist, nor is it to deny that some young people are extremely wealthy. As in any discussion on economics, we are talking in generalities here. It is however to say that, as well as being unfair, it is having a deleterious effect on our economy and stands to reinforce class barriers and social immobility at a time when we are flattering ourselves that such things have been relegated to our past.

Young people are hit by a sextuple whammy of costs that older people do not have to worry about to the same extent. These are: graduate debt, credit, saving for the future, environmental taxation, income-based taxes and housing costs. We should take a moment to consider each one in turn:

The problems
Housing costs
The owner-occupier dream of the Thatcherite 1980s is coming to an end. Only 20% of 20-24 year olds are homeowners, compared with 34% in 1994. First-time buyers now make up only 38% of total buyers¹.

Why is this? Simply enough, house prices have got out of control. According to the Department for Communities and Local Government², the average house price across the UK is now £190,051; in London it is £279,418. Median earnings meanwhile are £22,412 (less than one-eighth of the average house price) across the UK and £28,912 in London (less than one-ninth of the average London house price)³. According to Nationwide, the median home loan is now worth 3.21 times the incomes of those buying the property, compared with just 2.39 in 1994⁴. That of course means that half of new loans are being lent at even higher multiples. According to the Halifax⁵, public sector workers cannot afford average priced homes in 65% of towns, compared with just 24% five years ago. Mortgage repayments typically now use up 42% of take home income.

Unsurprisingly, 40% of first-time buyers now get parental help⁶. For many more people however, the solution is to simply rent. There again, the options available to people 20 years ago simply do not exist. The right-to-buy policies of the 1980s, which got so many people onto the housing ladder (earning many of them small fortunes in the process), were unsustainable as they depended on selling council housing that was not replaced.

One other option is buy-to-let: buy a house in a more affordable area than the one you live in and use the income from that as security. This in turn of course helps bloat the housing market even further, pricing even more first-time-buyers out of the market.

Ultimately, all of this must be unsustainable, although the bubble is still looking fairly robust at the moment. If the housing market does crash however, it is again young people who will predominantly suffer.

The obvious solution to all this is to build more affordable homes. Yet that has been official government policy for years now and little progress is being made. We cannot escape the fact that, under the current system, property developers have very little interest in building large numbers of affordable homes.

Graduate debt
People graduating from university this year owe an average of £13,500, according to the Association of Investment Trust Companies (AITC)⁷. As with many of these figures, it needs to be emphasised that this is an average: graduates from wealthy families typically have far less debt to repay, while poorer graduates will have significantly more. This figure also does not take into account variable top-up tuition fees, introduced this year: at a stroke, such fees will increase debt for graduates from the top universities by £9,000 to £12,000.

Liberal Democrat policy is to scrap tuition fees. This has been very popular, but it should be remembered that students from the poorest backgrounds don’t pay fees anyway while students running up average debts and paying full tuition fees would still end up graduating with £10,000 hanging over their heads.

One argument used to justify the increased burden that individuals themselves pay is that graduates earn more; the Dearing Report⁸ claimed that graduates would, on average, earn £400,000 more over their lifetime. Yet, as higher education has expanded, so the worth of each individual degree has fallen. The University of Swansea estimates⁹ that the ‘value’ of a degree for a male arts graduate is now just £22,000. Yet with degrees now a minimum requirement for so many jobs these days, non-graduates find themselves severely disadvantaged regardless of their ability.

Credit
71% of young people (aged 18-29) have an overdraft facility and one-in-five are permanently overdrawn¹⁰. 18.7% of all bankrupts were aged 18-29 in 2004/5, compared with just 7.8% in 2001/2.

There is a temptation to dismiss these figures as simply young people spending irresponsibly, yet that is to ignore how credit has been promoted quite as fiercely as it has been over the past couple of decades. It is also to ignore the fact that banks will tend to refuse lower interest loans to customers with little credit history while being quite happy to give them credit cards. Borrowing is treated as a rite of passage that young people are expected to go through and, whether individuals struggle or not, banks are guaranteed a profit.

To his enormous credit, Vince Cable MP has been making a noise¹¹ about the problems associated with unsustainable levels of debt for some time now. The party should pay him more attention.

Saving for old age
Young people are now expected to save for their own old age in a way that their parents’ generation never need worry about. Final salary pension schemes are a thing of the past. The Turner proposals¹², largely accepted by the government, offer some hope for the future, but there is no escaping the fact that, for them to work, people must contribute more out of their own salaries.

Yet as the importance of saving for the future has increased, in fact the opposite has happened. According to Pensions Minister James Purnell in July 2006¹³, the number of young people saving for a pension has fallen from one-in-three to one-in-four since 2000. Purnell was quick to pin the blame on young people themselves for their “live fast, die poor” lifestyles. Can we really simply dismiss this trend as shortsightedness, or are young people simply expected to cope with debt? This is a vital question for politicians to answer if they hope to make opt-out stakeholder pensions – one of the lynchpins behind the government’s new pensions strategy – a success. If it is financial pressures that are putting young people off from taking out second pensions, there is a real risk that a disproportionate number will opt-out under the new scheme.

Income-based taxes
There is no denying that income taxes fell significantly during the 1980s and 1990s. I mention them here because it needs to be emphasised that this form of taxation is paid predominantly by economically active middle-income earners: the rich avoid them while the poor and economically inactive pay very little.

In the recent past, income taxes have begun to creep up again, under the guise of national insurance contributions. Liberal Democrat policy in 2005 would have added an additional 4p in the pound due to the introduction of a local income tax.

Climate change and resource taxation
It is now largely accepted that the human race is responsible for global warming and climate change. Because of inaction in the past and little scope of major improvements in at least the short term, significant climate change is also now regarded as all but an inevitability. Mean temperatures are expected to increase by two degrees Celsius by 2050¹⁴. Today’s young people, their children and their grandchildren will be paying the price in the future.

Today’s young people, however, are also expected to pay the price now; environmental taxes will either creep up if the timidity of the current government continues, or significantly increase if a more environmentally responsible government takes control. Either way, today’s young people will be expected to bear the brunt, on top of everything else, in a way that their parents’ generation was never expected to.

The future – neo-feudalism?
What no-one should be blind to here is that these factors do not affect all young people equally. Families with assets are able to help their children out by subsidising student costs, housing and ultimately by passing on an inheritance. They help out in other ways too. A recent report from the Sutton Trust¹⁵ found that 54% of top journalists went to public school, up from 49% in 1986. Similar statistics can be found for the legal profession and other white-collar jobs.

One factor driving this is that, as more and more people have degrees, employers are increasingly dependent on other ways of assessing candidates. A simple mechanism used by a lot of employers is to offer internships and most young people who take up unpaid work experience in this way are dependent on their families to see them through. Thus the expansion of higher education seems to be doing little to improve opportunities for young people from poor backgrounds; indeed, it could actually be entrenching privilege.

There are other ways as well in which the ‘haves’ can consolidate their position. The subsidised loans available to students may be intended to help poorer students feed and house themselves at university, but increasingly they are used by wealthier families as an investment: invest the money in an ISA and pocket the difference. Inheritance tax, properly managed, is effectively voluntary, with wealth handed down the generations long before the aging relative dies – and the bigger the estate, the greater the likelihood that families will have made such provision.

The important question we should be asking ourselves is, where is this taking us? I have dubbed the (avoidable) nightmare scenario ‘neo-feudalism’. Through a combination of some talent, some hard work and a large amount of luck, some families are consolidating their position at the expense of other families. The current fad for buy-to-let could be the tip of the iceberg: there is every reason to believe that the people who play the system well will increase their property portfolios over time, pricing ever more people out of the property market in turn.

For the new underclass, the future is bleak, with the rising middle-class operating an effective closed shop in a way that would make the most militant shop steward baulk. Meanwhile, the children within these ‘landed’ families will be trapped in a cycle of dependency. These mini-Princes of Wales will be forced to wait impatiently for their inheritances to come through, conflicted by love for their parents and the desire for freedom and independence. Entrepreneurship, creativity and hard work will be stifled by an economy dominated by class and privilege.

Policy solutions
Higher education policy
The Liberal Democrats’ policy to scrap tuition fees has served the party well, but there are at least two major reasons for reviewing it.

A principled reason is that it doesn’t actually help the poorest. We may well wish to argue that students from lower middle class backgrounds can ill-afford the tuition fees they are forced to pay under the present system, but it is highly doubtful that scrapping fees will see a massive influx of students from the poorest backgrounds.

The pragmatic reason is that tuition fees have been with us for seven years now. Hundreds of thousands of young people have already paid them, and there is an increasing danger that this policy will decline in popularity as young people and their families increasingly ask themselves “well, we had to pay fees, so why shouldn’t they?”

One equitable solution to this would be to offer tax relief on student debt repayments. The full amount may not be affordable, but a significant proportion would not only amount to the same thing as paying full tuition costs, but would benefit all graduates.

Going further, we could replace our existing spending commitment to scrap fees with a return to the means-tested maintenance grant. This would target our funding at those least able to pay.

It is unlikely to amount to much while the massive expansion of higher education continues however, and this leads me to consider an even more radical proposal. Why not remove the universal state subsidy on university tuition altogether, replacing it with means-tested cover for both tuition and maintenance? This more targeted approach would enable us to help students most in need, while giving the market a greater role in determining demand for higher education.

There are bound to be howls of protest regarding this proposal and I have to admit I am not fully convinced of it myself: how would we preserve liberal arts departments for instance? How can the market determine how many medievalists the country to fund? I am merely throwing these ideas in to provoke a discussion I believe the party desperately needs to be having.

The bottom line for me is that, at the next general election, we need to have much more to say to both graduates and the poorest students. With the party committed to keeping spending commitments down to a minimum, this cannot be done without significantly changing our existing policy of tuition fees.

Taxation
Just as we are sometimes guilty of portraying our policy of tuition fees as a social justice issue when the poorest are unaffected, so the same is true with our policy to replace council tax with a local income tax. The claim is frequently made that it would benefit the poorest, and specifically pensioners. Yet the poorest are entitled to Council Tax Benefit and are thus exempt.
We aren’t, to be fair, alone in this. Help the Aged’s website¹⁶ claims that an elderly couple with just £182 per week income “could end up paying the same level of Council Tax as their neighbours, a young and wealthy couple with an income of tens of thousands”. Yet if you look elsewhere on this website, it helpfully explains that an elderly person on that level of income is exempt from the tax. A curious game of deception is at hand here, and unfortunately the Lib Dems bear much responsibility for it.

The real problem with our existing policy is that it represents a massive tax cut for the owners of some of the most valuable properties in the country, while shifting the entire burden of taxation onto economically active young people. This makes no economic sense at all and will help to increase property prices still further, enriching the wealthy and pricing even more people out of the housing market.

We are frequently told that this policy is important because it helps old people who may have large wealth, but have little income. In fact, asset rich, cash poor pensioners form a tiny minority. In his submission¹⁷ to the Tax Commission report, Prof Iain McLean cited research from Warwick University, which shows that just 1.2%-2% of the population fits into this category. There are other ways to ensure that this small group does not unduly suffer without introducing a system that would unfairly penalise others.

The signs coming from the party’s Tax Commission unfortunately sound remarkably confused. By the time you read this essay, its final report¹⁸ will have been published but, at the time of writing, it looks as if it will be a strange mix, calling for national income taxes on the one hand while introducing even higher local income taxes on the other. This strange, hybrid ‘pushmepullyou’ is unlikely to please anyone and is likely to confuse seriously both journalists and the general public.

So what’s the solution? Simply put, our new taxation policies have a property tax-shaped hole in them. We should fill it with our historical commitment to introduce a system of land value taxation. This would encourage greater efficiency of land, lower property prices, and discourage second home ownership and buy-to-lets. Safeguards could be introduced to ensure that old people would not be taxed out of their homes, such as a system whereby people could voluntarily choose to defer tax payments until after they realise the asset.

Funding the future
Britain is appalling at squandering its assets. North Sea oil, now rapidly drying up, has been used as a cash cow by successive chancellors for the past 30 years, with Gordon Brown using it to fund spending commitments last winter. Yet once this natural resource is gone, it’s gone.
Other countries have a more enlightened view. Since 1995, Norway has invested its North Sea oil receipts into its National Petroleum Fund (recently renamed the National Pension Fund)¹⁹. This fund, worth 1.48 trillion Kroner (about £125 billion or €185 billion) in 2006 and administered by the Central Bank, is designed to ensure that this short-term windfall is enjoyed by future generations.

Alaska operates a similar scheme called the Permanent Fund²⁰. Though much smaller – $32 billion (about £17 billion or €25 billion) at the end of 2005 – the fund is enough to pay out a dividend to Alaskan residents of around $1,000 per capita per year.

It is mostly too late to put Britain’s North Sea oil receipts into a similar fund, but as climate change is taken more seriously, this could be a useful way to handle receipts from environmental taxation.

Using environmental taxes to fund general expenditure is problematic at best, particularly at high levels, because if they are successful we can find ourselves with a shortfall. Climate change is likely to make the twenty-first century a very unstable period. Establishing a fund in this way would help give future generations a helping hand.

Getting our message across
One major objection to the party shifting its policy more towards young people is that older people vote in greater numbers and should therefore be our main target. I would repeat that I am not calling for us to ignore old people in elections, and strongly support our policy positions on a Citizens’ Pension and increasing the basic rate.

But, despite the fact that we all but stuffed their mouths with gold coins in the last election, old people did not generally vote for us. This is partly because of tribal loyalty, and partly because of a perception of the party brands – indeed, where we do well amongst older voters it is because they recognise our strengths as community campaigners. By contrast, younger people flocked to us in the last general election, despite us having very little to offer them. We have a real opportunity here not simply to capitalise on the votes of under-40s but to create lifelong Liberal Democrat supporters.

For such a campaign to work, however, it cannot simply be conducted by the occasional press release. At the moment, the media is largely unaware of this issue, normally reporting rises in property prices as an unequivocally good thing. For us to make an impact on this issue, our frontbench team must be seen championing it. It should get mentioned in every speech Ming Campbell makes between now and polling day.

The good news about a campaign aimed specifically at young people is that much of our target audience is web-savvy. What’s more, the people whom these issues affect are getting increasingly organised – see websites such as housepricecrash.co.uk, pricedout.org.uk and Hands Off Our Future. It is clear from reading the forums on sites such as these that there is a real sense of injustice out there and that people are crying out for a political party to take these issues on. If we miss this opportunity now, we may find ourselves paying the price in the future.

References
1 BBC (2006). How hard is it to afford a house? BBC News Online, 6 July; http://news.bbc.co.uk/1/hi/business/5145090.stm
2 UK Department for Communities and Local Government (2006). House Price Index – May 2006 (DCLG Statistical Release 2006/0051). Press release, 10 July; www.communities.gov.uk/index.asp?id=1002882&PressNoticeID=2197
3 Bachelor, L. & Flanagan, B. (2005). On average, you can’t afford it. Observer, 4 December; http://money.guardian.co.uk/houseprices/story/0,1456,1658132,00.html
4 BBC (2006). ibid.
5 Halifax plc (2006). Halifax Key Worker Housing Review. Press release, 29 July; www.hbosplc.com/economy/includes/KeyWorkerAffordability(UK).doc
6 BBC (2006). ibid.
7 AITC (2006). Press release, 9 August; www.aitc.co.uk/press_centre/default.asp?id=5439
8 The National Committee of Enquiry into Higher Education (1997). www.leeds.ac.uk/educol/ncihe/
9 O’Leary, N. & Sloane, P. (2005). The Changing Wage Return to an Undergraduate Education. IZA Discussion Paper No. 1549. http://ssrn.com/abstract=702781
10 Credit Action (2006). Debt statistics. www.creditaction.org.uk/debtstats.htm
11 Cable, V. (2006). Press release, 23 July; www.libdems.org.uk/news/young-peoples-debt-spiralling-out-of-control-cable.html
12 The Pensions Commission (2005). Second report. www.pensionscommission.org.uk
13 Purnell, J. (2006). Speech, 12 July; www.dwp.gov.uk/aboutus/2006/12-07-06.asp
14 UK Department for Environment, Food and Rural Affairs (2001). Literature review of the implications of climate change for species, habitats and the wider UK countryside. www.defra.gov.uk/wildlife-countryside/ewd/rrrpac/lreview/06.htm
15 The Sutton Trust (2006). The Educational Background of Leading Journalists. www.suttontrust.com/reports/Journalists-backgrounds-final-report.pdf
16 Help the Aged (2006). www.helptheaged.org.uk/en-gb/Campaigns/PensionsAndBenefits/CouncilTax/
17 McLean, I. (2006). www.libdemsalter.org.uk/archives/000078.php
18 Liberal Democrats (2006). Fairer, Simpler, Greener. Policy paper 75. www.libdems.org.uk/media/documents/policies/PP75%20Fairer%20Simpler%20Greener.pdf
19 Wikipedia (2006). The Government Pension Fund of Norway. http://en.wikipedia.org/wiki/The_Government_Pension_Fund_of_Norway
20 Wikipedia (2006). Alaska Permanent Fund. http://en.wikipedia.org/wiki/Alaska_Permanent_Fund