Fowler Financial: Creating A Fairer Society
A new generational contract is needed to tackle the big challenges faced by Britain’s young and old, according to a leading think tank.
The principle that different generations will provide support to each other at different stages of their lives underpins not just what we do as families, but also society as a whole. From education for the young to a State Pension for the old, the intergenerational contract has long defined the welfare state.
But there is widespread concern that the contract is being torn up. This is not through any change in sentiment – adults of all ages continue to buy into the idea1 – but rather because of a number of emerging challenges to the nation’s ability to deliver on the intergenerational promise.
In large part, the financial crisis is to blame. While all ages have experienced wage stagnation since 2008, younger people’s pay packets have been hit hardest. There has been a shift towards lower-paying and less secure jobs among young people. Millennials may become the first generation to record lower lifetime earnings than their predecessors.2
Families are responding to these challenges, but so far the state has failed to adapt. Indeed, changes to welfare policy in the wake of the economic downturn have only exacerbated the divide. For instance, real per-person spending for working-age adults is set to be nearly 15% lower in 2022-23 than in 2010-11. In contrast, benefit spending per pensioner will have increased by 2022-23, not least due to the triple lock.3 Meanwhile, the challenges of delivering the standards of healthcare that older generations deserve, need and expect is a reminder that the economy needs to work for all people – millennials and baby boomers alike.
“We want [baby boomers] to have decent healthcare, we want them not to be worried about social care, so we’ve got to maintain the welfare state. But we think that in order to do that you can’t impose all the taxes that are necessary on the younger generation,” says Lord Willetts, chair of the Intergenerational Commission.
The Commission, convened by the Resolution Foundation, has put forward ten key policy recommendations designed to meet these challenges, including an “NHS levy” funded by National Insurance on the earnings of workers over the State Pension age; surcharges on second and empty properties; and a reduction to stamp duty rates to encourage older homeowners to trade down.
There is also a proposal to replace Inheritance Tax (IHT) with a “Lifetime Receipts Tax”. Under this system, everyone would get a lifetime allowance for the receipt of gifts of £125,000. Anything received above that would be then be taxed in bands – 20p in the pound up to £500,000, and 30p after that. According to the report, the new tax would deter avoidance and raise an estimated £11 billion a year in 2021, compared with £6 billion under the present system.
The extra revenues would help to introduce a £10,000 “citizen’s inheritance” – a restricted-use asset endowment to all young adults to support skills, entrepreneurship, housing and pension saving.
The idea is to transfer money to 20-35-year-olds earlier, many of whom will not inherit anything until they are 61, on average. By that age, inheritances have arrived too late to support living standards during the expensive child-rearing stage, the report suggests.
Older generations can play a role in bringing these transfers forward. The Commission’s report states that gifting will play a growing role in how younger generations accumulate assets in the future. Parents/grandparents with available resources may find that gifts made during their own lifetimes are more beneficial to children than assets left through their estates. Each individual can legally give away up to £3,000 every tax year (£6,000 if the previous year’s allowance is used as well) without being liable for IHT. Larger sums become exempt from IHT if the donor survives for seven years after the gift has been made.
Nevertheless, not everyone is able to gift large amounts of money, and relying on a windfall to support living standards appears far from ideal, so policy interventions are vital if social mobility is to be a realistic prospect for more individuals.
“We can deliver the health and care older generations deserve without simply asking younger workers to bear all the costs. We can and should provide more security for young people, from the jobs they do to the homes they increasingly rent. And we can promote asset ownership for younger generations so that owning a home and access to a decent pension are realities not a distant prospect in 21st century Britain,” says Willetts.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
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1 Adults aged 16-75. The Millennial Bug, Intergenerational Commission, September 2017
2 Stagnation Generation, Intergenerational Commission, July 2016
3 A New Generational Contract, Intergenerational Commission, May 2018