Infometrics
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PUBLIC ACCESS:
The pension should stay
Fri 19 Mar 2010 by Nigel Pinkerton.

Apparently there is a growing rift forming between the baby boomers and the younger generations.   Some have gone so far as to warn that there is a "generational war" coming, as generation X and Y try and wrestle back political and economic control from their parents.   But from where I stand as a member of Gen-Y, things don’t look so bad.   Our living standards and expected lifetime income are much higher than my parents’ generation enjoyed.

There are three perceived injustices that have led to some animosity between members of my generation and the baby boomers.   The first perceived injustice is the fact that the baby boomers received a free education, while we got saddled with student loans.

Now generation Y struggles to get a foot on the property ladder while the baby boomer generation, who purchased their homes at prices we can only dream about, plans for retirement.

The third perceived injustice is the expectation that, when the baby boomers do retire, generation X and Y will be funding their pensions through our taxes.

Many members of Gen-Y would seemingly have no qualms about cutting our parents off in their retirement by ditching the increasingly expensive pension system.   Or alternatively, some have sort to force the baby boomer generation to pay for their own retirement.   They advocate the prefunding of future health and pension costs through vehicles such as the New Zealand Superannuation Fund.

These views struggle to stand up to scrutiny when all the issues are considered.   For example, just because our parents may have received free tertiary education in the 1960’s, doesn’t mean it’s unfair to have a lower subsidy on education in the 2000’s.   The private returns to tertiary education are now much higher than they were in the 1960’s.   Most students study primarily because they expect it will help them earn a higher income in the future.   For them studying is a form of investment, yet the government still heavily subsidises their fees.

Onto the issue of housing, it is true that higher house prices have led to a transfer of wealth from the younger generations to the older generation.   But this transfer has only served to reverse some of the gap that already existed between the expected lifetime income of Gen-Y and their parents.

When the baby-boomers were first entering the workforce in the early 1970’s the median income for an employed person was about $2,280 a year, which would buy the same as about $28,000 in today’s economy.   The average annual income for an employed person in 2009 was about $40,500 – 45% higher than in 1971.

Although the baby boomers may seem to have had a better ride in some respects, Gen-Y’s expected lifetime income is much higher.   Considering this point, does asking my generation to fund our parents’ pensions really seem grossly unfair?   Hopefully our children, who will also be wealthier than we are, will do the same for us in our retirement.

There is no denying that governments will have to make tough choices over the next fifty years in regards to spending.   The Treasury recently warned in its long-term fiscal statement that net debt would grow to over 200% of GDP by 2050, an unrealistic level, if government spending continues on the current path.   The baby boomers’ retirement could bankrupt New Zealand without any changes to current government policy.   The number of people aged 65 and over is projected to more than double by 2050.   This increase will place pressure on both the health and the pension system.   But cutting the pension altogether seems manifestly unjust.

The age of pension entitlement could be lifted at some point in the future.   The main justification for this move is that people are not only living longer, but are remaining healthier (and able to work) for longer than in years gone by.   A lift in the age of entitlement should be flagged well in advance so that people are given time to plan.   It should also be done in several stages so that no age group misses the boat completely.

Pensions could also be pegged to inflation rather than the average wage.   This move would preserve the current spending power of pensions while reducing cost increases over time.

Although some changes to the pension system will probably be needed, generation X and Y should not begrudge the baby boomers their taxpayer-subsidised retirement.   The baby boomers have lived through a time when earning prospects were significantly lower than we now enjoy.   The perks of free education and lower house prices seem weak by comparison to the opportunities available to my generation, courtesy of those who have gone before us.

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