The greatest threat to our economy comes from its ageing population. With the baby-boomer generation making up a large proportion of society, we find ourselves in a situation where public policy is mostly geared towards shoring up the gains made by boomers over the past 40 years, and industrial disputes are driven by an ageing union membership most worried about its pension entitlements.
It is a problem that Britain shares with its continental cousins, the US and Japan, now that all are struggling with a situation where a fifth of their populations is aged over 65 and the proportion is rising fast. Ageing populations have many effects on an economy, not least the desire among those nearing retirement age to save excessively.
Each country’s baby boomers pursue the holy grail of wealth slightly differently, but in the main, property and pensions are the twin pillars supporting decades of retirement. When wealth is your goal, there is one evil monster that needs slaying, and that is inflation. This is one of the main reasons that since the 1990s the Bank of England is under instruction to keep inflation anchored around 2%.
A recent blog by economists at the Bank has caused a stir by arguing that far from the baby-boomer savings glut being a passing phase – or at least a situation that will fade as the boomers die off – it will be with us for decades to come.
They argue that boomers have shown that they want to keep saving even as they move into their 80s and 90s, to fund possible extra health and care costs, and to pass on the maximum amount of wealth they can to their heirs. Some academics have argued that boomers will be forced to spend more than they save in later life to pay for health and long-term care, but that doesn’t appear to be happening.
The glut of stocks, bonds and property savings will maintain the trend of too much money chasing too few opportunities
The $100 trillion of savings sloshing round the global financial system just keeps growing. This is not just because people in young nations such as Indonesia and India are starting to build up savings, but because older Brits, Germans and Swedes are doing the same when there had been an expectation that they would switch to spending.
You could see this trend in public policy changes under the ever-astute – and cravenly vote-seeking – chancellorship of George Osborne, who pledged to increase the inheritance tax threshold for couples to £1m as a sweetener for older boomers. He also introduced changes that gave better-off pension savers the flexibility they craved to maximise their gains. This blew away the last vestiges of welfarism in private pension saving, and was a huge vote winner.
An example of wealthy boomer behaviour could be seen in the Yorkshire Dales last week, where a plan to impose a 500% rise in council tax on second homes was defeated. The Dales Homeowners Action Group, set up to fight the proposal, said the planned increase, which would raise the average band D charge to £8,500 a year, would have caused a house price crash as property flooded the market. When an estimated 3.4 million people in Britain own a holiday property, and with most of these owners likely to be over 50, it is not hard to see this as a powerful lobby of baby boomers acting to protect their gains.
The Bank of England blog argues that the persistent glut of savings in stocks, bonds and property will maintain the trend of the past 30 years – of an excess of money chasing too few investment opportunities. And if older savers resist spending some of their pension, demand for goods is lower than expected, and inflation stays low.
Central banks, in seeking to maintain a 2% inflation target, are the agents of baby boomers. It is their savings and wealth that are protected, not those of the young, who have much less, if any.
Like most central bankers, Bank of England governor Mark Carney has acted to spur the economy with cheap borrowing, to howls of protest from savers.
But his remit stops government from going any further. For instance, there are several past and present members of the Bank’s monetary policy committee who believe it was in the interests of the economy, if not of savers, to push interest rates even lower in the wake of the 2008 financial crash.
There is an argument for a Treasury takeover of the Bank, ending its independence, to allow for higher inflation. With the politicians in charge, a 4% inflation target would allow interest rates to stay lower for longer, increase borrowing and discourage savings.
But when the Treasury is enslaved to the boomers, unable to increase taxes, what would be the point? It’s the boomers who need to see the light and vote for policies that share wealth. While they hoard it, they kill the chances of helping younger generations.