In the late 18th century, French philosopher Jean-Jacques Rousseau wrote about the existence of a "social contract" between citizens and the government.
A similarly unwritten set of rules exists between generations: children promise they’ll take care of their parents, because they expect to be treated the same in the future.
A new report by the Intergenerational Commission, a group of experts organised by the Resolution Foundation think tank, shows that this second contract has broken down in the UK.
For the first time in decades, young people don't expect to be richer than their parents. The analysis is spot on, and would apply to plenty of other European countries. Yet many of the proposed remedies, including a £10,000 (Dh49,697) “citizens' inheritance” for cash-strapped young adults, fall short – and could prove counterproductive.
The most striking difference setting apart British millennials from earlier cohorts is pay growth. While in the past, each generation had higher real earnings than their predecessors, people born in the 1980s haven’t enjoyed similar. They’re grappling, too, with problems that their parents never had to face, from expensive housing to uncertain pensions.
These problems are even worse in places in Europe that can’t match Britain’s healthy labour market. During the financial crisis, youth unemployment in the UK rose by less than in previous recessions. Jobs have recovered strongly since. Millennials in other countries, from Greece and Italy to France and Spain, haven’t been that lucky. According to a recent study by the International Monetary Fund, one in four youths in Southern Europe is at risk of poverty.
Unfortunately, the suggested remedies for the UK from the Intergenerational Commission are disappointing. Take, for example, that idea of giving all 25-year-olds £10,000. This subsidy could be spent only on a limited range of items, including paying back student debt, investing in training or buying a house.
For a start, such lump-sum payments would go to all younger people, regardless of income and wealth. That would be a poor use of state money, which is better targeted on the disadvantaged. Second, these subsidies typically end up increasing the price of the items they can be spent on. Universities would no doubt bump up fees for graduate courses, knowing there’s an extra £10,000 to squeeze from students.
It’s unclear too whether all the report’s objectives make sense. Nudging young people toward saving for pensions, for example by exempting employee contributions from National Insurance, is a good idea. However, the usefulness of contributing toward housing deposits is less obvious, given the daunting cost of British homes. Politicians should work instead on increasing housing supply, something the report recommends, too.
Finally, one wonders whether the report’s recommendations are ambitious enough. Asking older people to pay £2.3 billion more a year for the National Health Service by raising retiree National Insurance payments is one way to tip the scales. But the distributional implications across generations would be small.
More radical ideas exist, for example setting all tax rates depending on the age of workers, as recommended by Matthew Weinzierl, an economist at Harvard Business School. In countries with strong state pensions, governments could cut excessive benefits when they are much higher than workers’ contributions.
Ultimately, though, the state can only do so much in re-settling the intergenerational contract. Much faster economic growth than we’ve had over the past decade, accompanied by an acceleration of wages, is essential to today's young workers. To the extent that the government can help, policies need to be laser-targeted and radical.
The Intergenerational Commission could have done better on both counts.