The emerging intergenerational pay gap

21^st December 2014

After last week’s Autumn Budget Statement a number of news articles reported on the growing evidence that pensioners are actually fairly well-off these days. This is a bit of shock to someone my age (just turned 60): all my life I’ve been accustomed to viewing the elderly as generally impoverished and precariously vulnerable to the slings and arrows of financial fortune.

It would be wrong to conclude that all is now rosy in old age: far from it. According to the Joseph Rowntree Foundation (Monitoring Poverty and Social Exclusion, 2014) 14% of pensioner households live in poverty (on less than 60% of the national median income, once housing costs have been paid). But this figure was 40% in 1988. By contrast, the number of working households living in poverty has doubled from 11% in 1982 to 22% in 2013. With the state pension protected by the “triple lock” guaranteeing at least a 2.5% annual increase, the elderly have been relatively well insulated from the full force of the government’s austerity measures; these have more typically targeted the young and young working-age families, with cuts to, or freezes on, child benefit and child tax credits, working tax credits, housing benefits, the Education Maintenance Allowance and so forth.

And as the “Baby Boomers” now enter retirement, they are likely to do so with the cushion of inflated house values and yields from public sector and private pensions that are far higher that any younger generation might expect when their day comes.

Squeezed Youth

This shift in the locus of hardship, towards the young, is borne out too in wages, as research by the Intergenerational Foundation (IF) has shown. Squeezed Youth: The Intergenerational Pay Gap and Cost of Living Crisis lays out the statistical facts of the case. Essentially, wages for the young have been flatlining or worse since 1997, whereas older workers have seen a steady increase. For instance, the median gross weekly wages of someone aged 18–21 have fallen by almost a fifth in real terms since 1997, whereas workers who are in their 50s have seen their earnings increase by 25% over the same period. Of course, it is normal that workers in their 50s should earn considerably more that workers at the beginning of their careers: but you would expect the earnings of the latter to track the former proportionally. This has not been the case: the gap between the two has widened substantially – by more the 50% since 1997, for instance, when comparing the gross weekly pay of workers in their 50s and workers aged 18–21.

Incomes have been under pressure across the wage spectrum since the financial crisis of 2007/8, but the younger the more so, according to the Institute for Fiscal Studies’ report Living Standards, Poverty and Inequality in the UK: 2014. For 31–59 year olds median pay fell 6% to 2012/13, whereas for the 22–30 age group it fell 15%.

Young people additionally face a noticeably greater lack of job security. Zero-hours contracts may suit a minority who welcome the flexibility, but for most people trying to balance their own books the uncertainly is stressful, if not pernicious. Those coming out of university, carrying a huge burden of tuition-fee debt, may well only be able to get their foot in the door of employment through long, unpaid internships, with no certainty that these will lead to permanent jobs. To make ends meet, many end up as “gringos”: “graduates in non-graduate occupations” – with no prospect of ever paying off their tuitions fees.

Scraping by

When people face low and flatlining wages, they will be slowly squeezed by inflation pushing up costs. Households headed by young people are now spending more than ever before on just the basic necessities such as housing costs, food, fuel, power and transport, leaving them with little (if any) spare money for anything else. Another IF paper, Spending Power across the Generations, analysed data to see how spending on the rewards of working life – theatre and cinema tickets, hotels, eating out etc –varies between the generations. The results showed conclusively that older households have been spending more in these areas over recent years, and younger households less.

Young people deprived of their luxuries? Poor lambs! But this picture should not be dismissed so lightly. If young people do not have any money to spend on anything beyond bare necessities, neither do they have the resources to progress along the path of adulthood as previous generations have: to save for a mortgage deposit, to put money aside for a pension, to provide the security and stability to start a family. These considerations have serious intergenerational consequences that will slowly but surely shape the future of society. A final fact to underline our changing times: more than 25% of young people under 30 still live with their parents.