The pension should stay

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

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

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

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

Many members of Gen-Y would seemingly have no qualms aboutcutting our parents off in their retirement by ditching the increasinglyexpensive pension system.   Or alternatively, some have sort to force the babyboomer generation to pay for their own retirement.   They advocate theprefunding of future health and pension costs through vehicles such as the NewZealand Superannuation Fund.

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

Onto the issue of housing, it is true that higher houseprices have led to a transfer of wealth from the younger generations to theolder generation.   But this transfer has only served to reverse some of the gapthat already existed between the expected lifetime income of Gen-Y and theirparents.

When the baby-boomers were first entering the workforce inthe early 1970’s the median income for an employed person was about $2,280 ayear, which would buy the same as about $28,000 in today’s economy.   Theaverage 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 ridein some respects, Gen-Y’s expected lifetime income is much higher.   Consideringthis point, does asking my generation to fund our parents’ pensions really seemgrossly unfair?   Hopefully our children, who will also be wealthier than weare, will do the same for us in our retirement.

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

The age of pension entitlement could be lifted at some pointin the future.   The main justification for this move is that people are notonly living longer, but are remaining healthier (and able to work) for longerthan in years gone by.   A lift in the age of entitlement should be flagged wellin advance so that people are given time to plan.   It should also be done inseveral stages so that no age group misses the boat completely.  

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

Although some changes to the pension system will probably beneeded, generation X and Y should not begrudge the baby boomers theirtaxpayer-subsidised retirement.   The baby boomers have lived through a timewhen earning prospects were significantly lower than we now enjoy.   The perksof free education and lower house prices seem weak by comparison to theopportunities available to my generation, courtesy of those who have gonebefore us.

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