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«September 2007 International Longevity Centre - UK The International Longevity Centre - UK (ILCUK) is an independent, non-partisan ...»

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Nevertheless, given the increases in net household wealth experienced by older cohorts, some could argue that universal welfare transfers to older people cannot be justified in all cases. For example, when a typical 70-year old has seen their net household wealth increase by £107,000 in the decade to 2005, it could be questioned why such a household is entitled to £300 each year as a notional payment toward winter fuel costs.

The appropriate response may therefore be for policymakers to both tackle the problems of means-testing in practice, and if - and only if - successful, to review the scope for extending the scope of means-testing to other welfare payments. Although such an argument runs counter to the strong feelings and beliefs of many stakeholders involved in advancing older people’s interests, this perhaps represents the failure common among many observers to recognise the wealth transfer and inter-generational inequality that has developed in the UK over the last decade.

Indeed, rather than a disincentive to saving, it seems more likely that means-testing will have an effect by incentivizing those at the threshold to transfer wealth to children, mirroring the behavioural incentives introduced by inheritance tax.

See http://www2.warwick.ac.uk/about/warwickmagazine08/coldcomfort Wealth Transfers and Intergenerational Solidarity The principle of intergenerational solidarity underpins various functions of the state.

However, wealth transfers in society that have occurred between the generations require us to reconsider conventional notions of ‘inequality’ and the role of intergenerational solidarity in public policy.

Background When ‘intergenerational solidarity’ is discussed, it is usually conceived of at the level of an individual family. Intergenerational solidarity is said to be reflected in the time, money and contributions (transfers) which different generations within a family make to each other.

However, intergenerational solidarity does not just exist in families; it exists between different cohorts within the population. The manifestation of this intergenerational solidarity across society can be found in multiple functions and activities of the state.

For example, the UK health system is a classic example of intergenerational solidarity. The NHS is funded in large part by taxes on the working age population. However, usage of healthcare is significantly associated with proximity to death, which for most people is in retirement 27. Implicit in the continued existence of the NHS is, therefore, an intergenerational contract that sees younger healthier individuals contribute through general taxation to the costs of the NHS, on the understanding that in old age, when retirement from the labour market reduces their contribution to general taxation, younger generations will fund the NHS and the costs of their healthcare in old-age.

A second example is the state pension. When working-age individuals make state pension contributions through labour taxes, their contributions do not in fact go into specific allocated pension accounts, but instead contribute to the cost of paying a state pension to older generations. Again, implicit in this policy is a contract between the generations that each generation will pay for the state pension of the previous generation through general taxation, on the expectation that subsequent generations will do the same for them.

Such intergenerational contracts rely on a continued sense of intergenerational solidarity among the population, and this sense of solidarity relies in turn on a perceived equity between the generations.

Asset Accumulation across the Life Course Two important findings from the Asset Accumulation across the Life Course research are the dramatic increases in the net non-pension assets of older generations in the decade after 1995, and the significant increase in the average household mortgage debt of younger generations.

These two findings are linked. The major driver of the increase in asset holdings of older generations has been inflation in the prices of their property assets. This price inflation has been driven by dramatic increases in the average value of mortgage debt held by young and middle-aged cohorts.

For example, see Seshamani and Gray (2004).

The Asset Accumulation across the Life Course research shows that during 1995-2005, through the transfers of wealth that occur in the property market during a period of rising prices, younger cohorts have seen a growing proportion of their current and future income and wealth transferred to older cohorts as illiquid property wealth. Future young cohorts are also likely to confront volumes of mortgage debt not experienced by older cohorts.

This fact should not be overstated. First, some - but by no means all - younger households have received transfers from older cohorts to help with property purchases. However these transfers are typically one-off, far from universal, and are considerably less in value than the average net increase in household wealth experienced by older cohorts. Second, older people have not ‘grabbed’ the bulk of wealth in society nor, in fact, do they now have a radically larger share of the wealth in society. An interesting finding of the Asset Accumulation across the Life Course research is that the relative proportion of total wealth held by different generations has not changed dramatically 28.





The Challenge The transfer of wealth from young to old, and its consequent inequality, represents a challenge to the contract between generations embodied in various functions and policies of the UK state that rest on the principle of intergenerational solidarity.

The wealth transfer from young and middle-aged cohorts to older cohorts that has occurred via the housing market has not gone unnoticed by professional commentators 29. Among the wider public, many people have also become aware of growing wealth imbalances between the generations, albeit mediated through expectations of individual family wealth transfers down different generations of a family.

For policymakers, the challenge is how best to respond to this transfer of wealth. A number of current major public policy challenges require the balancing of the interests of different generations. Policymakers must carefully navigate issues of intergenerational solidarity, intergenerational equity, and the income and wealth needs of different cohorts at different lifestages.

Recommendations

–  –  –

Traditional methods of measuring and discussing inequality, such as the ‘Gini coefficient’, ignore age, life-stage and differences between cohorts. The result is that in both ‘professional’ and ‘lay’ debate, the implications of changing patterns of asset accumulation across the life course have been relatively unnoticed and lacked discussion. However, inequality across generations (horizontal) and increasing inequality between generations (vertical), require a new approach and discourse for discussing and debating inequality. This is important for enabling politicians and policymakers to consider the appropriate response to these societal changes, and forge consensus. Stakeholders must now recognise that inequality between the generations is as important as traditional measures of inequality.

• Protect intergenerational solidarity If changes in the housing market and resulting wealth transfers have weakened the legitimacy of the intergenerational contract that is embodied in various functions of the See Figure 5.3 Distribution of Net Assets across Age in Asset Accumulation across the Life Course.

For example, Weale M (2007) writes that what has seemed ‘manna from heaven’ for older homeowners is “in fact financed by the younger people to whom they sell their houses.” state, policymakers must monitor and evaluate when the challenge to this legitimacy becomes so severe as to warrant a response.

Debate exists as to why property price inflation has increased so remarkably in recent decades. As a result, it is unclear what policy measures would be most effective at reducing UK house price inflation. However, for as long as the housing market continues to function as a mechanism to redistribute wealth from younger to older cohorts, policymakers will need to monitor this redistribution, its implications for intergenerational solidarity, and evaluate whether public policy must be directed explicitly at slowing or halting this redistribution.

• Risk sharing across - not between - generations Through mechanisms such as the NHS, the state applies the principle of intergenerational solidarity to pool risks between generations. In light of wealth transfers from young to old, the Government must now review the case for increasingly pooling risk across generations (horizontally), not between generations (vertically), in the development of future policy.

This is important because it suggests a new approach as the UK contemplates its ageing population. Demographic change, and the transition of the ‘baby-boomer’ generation into old-age, poses the risk of significant economic costs to both families and the state.

However, recognising the wealth transfers that have taken place, the Government must mediate the extent to which it seeks to share the economic risks created by the UK’s ageing population between generations. Protecting the existing functions of the state that rely on solidarity between the generations may mean limiting the use of further policies that rely on implicit intergenerational contracts. It may be necessary to pool risks across generations, not vertically, via the state and general taxation. A good example of where this may be necessary is funding long-term care for older people.

Funding Long-term Care in the UK

As the UK population ages, society confronts a growing demand for long-term care by older people, which will be provided both ‘formally’ and as unpaid care. How society pays for formal long-term care for older people is one of the key strategic dilemmas confronting UK policymakers. New patterns of wealth holdings in the UK suggest certain approaches to solving this problem.

Background The UK confronts a growing demand for personal care by older people, resulting from increasing longevity and demographic change. As described above, the UK also confronts a declining ‘elderly support ratio’.

The Wanless Review (2006) explored a ‘baseline scenario’, which assumed that patterns of social care services and outcomes in the future will be the same as now (even though, as the Review recognises, there is widespread consensus that current social care spending is insufficient, resulting in morally unacceptable outcomes for many older people requiring care).

Using this baseline scenario, the Wanless Review projected total costs of £10.1 billion in 2002 rising by 139% between 2002 and 2026 to £24.0 billion. This would represent an increase from 1.1% of GDP to 1.5%. More ‘pessimistic’ scenarios project the cost of social care as a proportion of GDP being even higher. Increasing the amount that society spends on long-term care for older people to simply maintain existing levels of inadequate provision represents a major challenge for policymakers.

Different funding models for enabling an increase in this spending have been proposed. The Royal Commission on Long-Term Care recommended free nursing and personal care to be available for all; an approach that was subsequently taken up in Scotland. The Wanless Review recommended a ‘partnership model’ in which everyone needing care is entitled to an agreed level of free care, after which individuals’ contributions would be matched by the state up to a defined limit. Individuals on low incomes would be eligible for benefits to help fund their contributions.

Asset Accumulation across the Life Course

All age-groups have seen an increase in their net assets in the decade up to 2005, and older age-groups, even in retirement, have not been exempt from this trend. For example, an individual in the 70-79 age-range in 2005 had net household assets of around £185,000, up from £98,000 in 1995. The key driver of these changes has been house-price inflation.

Among older owner-occupiers:

- Individuals aged 75 in 2005 had seen an increase in net household property wealth of around £118,000 in the previous decade.

- Individuals aged 70 in 2005 had seen an increase in net household property wealth of around £127,000 in the previous decade.



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