Big bang: baby boomers are blowing the future for us all

The boomers, roughly those born between 1945 and 1965, have concentrated wealth and power in the hands of their own generation. A big cohort — at 17m, bigger than those before or since — they have presided over huge social change and prosperity. Now they are getting old, the bills are coming in, and it is the younger generations who will pay them. We have a good idea of what some of these future costs are — boomer pensions and servicing the debt that the government has built up, to name but two. The charge is that the boomers are guilty of a monumental failure to protect the interests of future generations.

Wealth first: there is about £6.7 trillion of wealth in our country, and my personal rough estimate is that the boomers — those aged between their mid-forties and mid-sixties — own about £3.5 trillion of this, with the older generation owning most of the rest.

This would not matter so much if it were just a repeat of the usual pattern of wealth distribution between generations, in which the young always own less but catch up as they too get older — but it’s not. The younger generation today has much worse prospects of building up wealth in the same way. The ladder has been pulled up. That is the real injustice.

Just how has this happened? Imagine a group of hunter-gatherers in which everything you kill is eaten. Children and the elderly need to be fed out of the surplus caught by the adult hunters.

Over the course of each life everyone is both a contributor and a beneficiary, so the food you catch and the food you consume roughly net out to a balance. Each generation, in this setup, eventually consumes an amount equal to what it produces. Living together in a tribe enables consumption to be spread across lives in this way. This informal contract between the generations is fundamental to the family and society.

Our tribe is stable until some mild winters mean more babies survive infancy. It has a baby boom. What happens?

For a start, more hunters means they can hunt more mammoths. Moreover, the surge in the number of hunters means that there are more of them relative to the elderly members of the tribe who are not hunters. There is a greater feeling of prosperity as each has to distribute less to other members of the tribe.

They can devote more time to cave painting. They can cut back on the frequency of hunting and gather exotic berries that make them feel good at their tribal festivals. It is an age of plenty and of experiment.

Then this big generation of hunters starts to grow old and hands on its spears to the younger generation. There is no avoiding the fact that there are more old ex-hunters to be maintained. So the next generation of hunters finds that more of what it catches needs to be taken for other members of the tribe. Life seems tougher.

There is a final, crucial twist. The clan is run by a democratic tribal council. That big generation therefore has the most votes and power and uses this to protect itself.

Younger hunters face a double squeeze — with more retired hunters to support and more expected from each one of them. They have to spend more time hunting. They want to raise their kids in the same generous way that their parents raised them but it seems harder and as a result they don’t have so many of them.

Our thought experiment shows a society that worked until a big generation came along that took more of what it produced during its prime and then tried to take more from later generations when it was in need.

Maybe the problem was size. Maybe it was the way it used the power that came with its size. But, whatever the reason, the principle of fairness across the generations was broken. And it threatened to break that society.

Now look closely at what’s happening to the boomers and the generations that followed them today, comparing the situations faced by a classic boomer and a 25-year-old.

Our classic boomer, born at the mid-point of the boom in 1955, and aged 50 in 2005, was then at the peak of his earnings, with average net weekly household income of £584, the highest of any age group. Over the previous decade, his assets had shot up, too, from £40,000 to £160,000.

Our tribe is stable until some mild winters mean more babies survive infancy. It has a baby boom

Boomers are likely to have been a member of a good occupational pension scheme. Although it may have closed now, they have built up some pension rights that are inflation-protected with provision for their widow or widower too.

By contrast, the 25-year-old probably had to pay for university education, so he or she started work with heavy debt. He could well have no assets, once debts have been deducted, for another decade at least, longer than any previous generation.

His jobs are likely to be temporary and modestly paid. Thirty years ago, when the baby boomers were entering the jobs market, the biggest private sector employer was GEC. That company is now history and the only significant surviving asset is its pension scheme, to pay final salary pensions to its former employees. Instead, our biggest private sector employer is Tesco. The biggest employer of young people is McDonald’s.

The typical under-35 now owes more than £9,000 in credit card and student debt. Their repayments are more than £200 per month, three times as much as they are saving in a pension. Their chances of catching up with the generation above are low.

We can link these snapshots by measuring the average of when people in Britain do their consuming and the average when we do our producing. Economists take all the consumption going on by adults in one year and work out the average age of the consumer.

Two researchers have done this calculation for contemporary Britain: John Ermisch for the mid-1980s and Martin Weale for early this century. They get a broadly similar answer of an average age of production of about 41 years. So half of our national output is being produced by people aged 41 and under.

We can also measure the average age of consumption. In the mid-1980s this was 46. But it’s now 48 and going up. So half of all the consuming in our country is now done by people aged 48 and over. It is rising as the baby boomers age. This is important evidence — because it backs up my intuition that over the past 20 years Britain has seen a real shift of power and wealth to the baby boomers.

Nothing illustrates the shift more clearly than the boomer response to the house price explosion. About four-fifths of boomers are owner-occupiers. As their homes shot up in value, some years earning more than they did, the boomers increasingly came to think of their houses as not just places to live but their own personal gold mines that could pay for holidays or cars, or be their pensions. Encouraged by the government as well as by the banks, they borrowed as if there were no tomorrow. And as financial services became more sophisticated, they became alchemists, converting paper increases in the value of their homes into extra money to spend.

The house price boom led directly to a drastic fall in the saving ratio — our personal saving rate went negative, almost unprecedented for any large western economy — and that in turn now imposes a heavy burden on their children. For where does this money that the boomers thought they had actually come from?

From their children, who will have to spend more for their house and will have less of an inheritance to pay for it. So they have to pay more for their house out of their lifetime earnings.

Martin Weale has calculated the scale of what we are talking about. House prices rose between 1987 and 2006 at 1.9% per annum faster than real earnings. That adds up to an extra £1,300 billion of housing wealth on top of what would have matched the growth in our incomes. It is approximately 100% of GDP transferred to current houseowners from future houseowners. This is a heavy burden for the next generation — it is as if the government had increased the national debt by that amount and left the younger generation to pay it off with higher taxes.

There have been similar stark shifts in pension wealth. The total value of our savings in company pension schemes and personal pensions is about £1.8 trillion. Many of the big pension schemes are now maturing, with more and more pensioners and fewer and fewer active contributors. About 30% of men in their fifties are members of such generous schemes but almost no men in their twenties.

We can see who gains and who loses when a company announces it is closing its pension scheme to new members, plugging the deficit with an injection of company funds and setting up a new, much less valuable, defined contribution pension for new employees. Profits from the company as a whole, earned by employees of all ages, are diverted into keeping afloat a scheme that is not available to the younger staff. It is the young new recruits who are the poor bloody infantry being sacrificed as the generals fight the pensions crisis.

And that’s just property and pensions. Truly, a young person could be forgiven for believing that the way in which economic and social policy is now conducted is little less than a conspiracy by the middle-aged against the young.

That young person has a point — but the boomers should worry too. The repercussions affect everyone. For if it is far harder for the young to get started on the housing ladder, to find a job or to save for the future, they are more dependent on their parents for longer. That in turn means new barriers to the spread of ownership and opportunity: indeed it threatens social mobility altogether. For those at the bottom of the heap, growing to adulthood and starting a family becomes more difficult. Social divisions are reinforced.

I do not believe that this is because the boomers are unusually bad and selfish. I think it is rather that we have lost sight of the importance of the contract between the generations that holds any society together. The breaking of this contract is above all what is broken about our society. It is what links the fragility of our families, the decline of social mobility, the burden of government debt, and even the costs of climate change.

This is where politics comes in, the kind of politics that is rooted in fundamental shared human experiences: the pattern of our lives as we move through the different ages of the life cycle.

The family is key to this: it’s there we first learn to help and be helped by others older and younger than ourselves and where the first sense of future obligations — my mother looked after me, one day I shall look after her — kicks in. A family is a mini-welfare state — with several key differences. For the welfare state, thanks to the boomer pensioners, will soon be heavily weighted towards the needs of the old. And families traditionally have tended to focus more on the young.

Indeed, you have only to look at how much people worry about their children and grandchildren’s prospects, their schools and their jobs to recognise the enduring power of the intergenerational bond — at the family level.

Now we need to be more than just good parents; we need to be good citizens, broadening out this concern for the young so it includes our obligations to the next generation. If we are to tackle the mess created by the big generation, we all need to think big in our turn.

David Willetts is the shadow universities and skills secretary.

This extract is taken from The Pinch: How the Baby Boomers Stole Their Children’s Futures and Why They Should Give Them Back by David Willetts, published by Atlantic Books at £18.99