David Willetts

In a speech to Policy Exchange, David Willetts discusses how one of the most important (and overlooked) issues in British politics is the obligation of one generation to do the best it can for the next, and how this issue has become more important in recent years.

“I used to think ‘Bladerunner’ was the 1980’s film with the most powerful vision of the future. Now I think instead of two rather unlikely French films set deep in rural France - Jean de Florette’ and ‘Manon des Sources.’ Those two films were based on the novels of Marcel Pagnol whose writing touched on deep French fears about depopulation in rural France.

Yves Montand acts the role of Cesar Subeyran, a prosperous farmer. He and his unappealing nephew Ugelin want to take over the neighbouring farm which has a spring. They try to buy it but the old farmer refuses. When he dies it is taken over by a newcomer, acted by Gerard Depardieu. He struggles heroically to make the farm a success but Subeyran and Ugelin have blocked up the spring on the farm. His increasingly desperate search for water ultimately results in his death.

The farm is taken over by his daughter, Manon, who discovers what Subeyron and Ugelin have done and seeks revenge for her father’s death. By the end of the film Ugelin has hanged himself and Subeyran has the shock of discovering that Jean, the man he worked so assiduously to destroy, was actually his son. Subeyran had been determined to continue his bloodline through his nephew. But eventually, as a result of his own actions, it is extinguished with the deaths of both his nephew and his son. He dies tortured with this knowledge.

It seems like a world away from Britain today. But the films raise deep questions about fairness across the generations. Even though Subeyran wanted to help his nephew and pass on his wealth to the next generation he conspired in blocking up the spring of future prosperity for the next generation. It is a melodramatic version of the strangely mixed emotions of so many middle-aged parents who are proud of the wealth they have in their house but increasingly anxious whether their own children can ever hope to buy a place of their own.

We used to think in Britain of a society divided by class. Increasingly we worry about a society divided by conflicts of culture and identity. But I believe there is another division, even more significant but much less remarked upon. We are also living in a society increasingly divided by age. Are we really ensuring that the younger generation have the wealth and opportunities we have had? Or are we Soubeyrans who, despite our desire to help our own, are really blocking the fountains of future prosperity for them? It is this question of fairness across the generations that I want to focus on today. It is the moral and political question that lies behind the forthcoming Turner Report, and much more political debate besides.

Our Financial Assets

Let’s begin with the basic financial facts. The total net financial worth of people in Britain is over £5,000bn. It can broadly be broken up into three main categories.

• First there is about £1,200bn of wealth which people directly hold in financial assets – savings accounts, stocks and shares that they personally own.
• Secondly, there is a little bit more, perhaps £1,300bn, in our funded pensions.
• Thirdly, there is the value of our housing net of mortgages on it, which comes out now to over £2,500bn.

There has been an enormous increase in our total personal wealth over the last 20 years. Within that there has been a massive shift in the composition of our wealth as our pensions have stagnated whilst housing has boomed. Before the great housing boom and council house sales of the past 30 years, housing was less than one-fifth of total wealth: it has shot up to nearly half.. A generation ago housing wealth used to be worth less than our pension. When Labour came to office our housing was worth about the same as our pensions. Now it is worth double. The house price boom and the pension crisis have massively shifted personal wealth in Britain away from funded savings and towards housing. Let’s look at the three key types of personal wealth a bit more closely.

First, personal financial assets are skewed most heavily towards the older and the rich. The top quarter of 50-69-year-olds own 84% of all the financial wealth held by that age group. Having built it up rapidly in their 50’s and early 60’s it is then run down quite fast to boost incomes in retirement.

Pensions

Pensions, our second asset, are more widely distributed. There is now a sharp decline in private sector pensions, masked to some extent by an increase in the public sector. Many of the big schemes are now maturing, with more and more pensioners and fewer and fewer active contributors. Two years ago the interim Turner Report estimated that the number of active members of open Defined Benefit schemes in the private sector had fallen by 60% since 1995. There are perhaps 4 million private sector employees who are in such schemes, less than a quarter of total private sector employment. On current trends there could well be only 1 to 2 million private sector employees who are active members of Defined Benefit schemes in 20 years’ time. And again, there is a very clear age distribution to all this. Perhaps 30% of men in their 50’s are members of such schemes but less than 20% of men in their 20’s. It is older workers who have this increasingly rare and precious form of pension provision.

The classic response of a company to the pension crisis of the past few years has been to close its pension scheme to new members, plug the deficit with an injection of company funds and set up a new, much less valuable, Defined Contribution pension for new employees. This adds up to a very dramatic shift in resources across the generations. The traditional final salary scheme remains for established older employees. Profits from the company as a whole are diverted into plugging the deficit in their scheme. New employees who are much younger have a much less generous pension to look forward to, or rather not. It is the young new recruits who are the poor bloody infantry being sacrificed as the generals fight the pensions crisis.

The Government’s policy on public sector pensions is the most extreme example. Alan Johnson, to widespread derision, has given up on the aim of any increase in the retirement age for existing public sector employees. However, the Treasury stoutly maintains that they are still going to achieve the long-term savings from reforms to the public sector pensions that they have already counted in their long-term fiscal forecasts. This is barely credible but the only way they could possibly do this is by an even less generous pension for new recruits. The gap between the pension of existing employees and future employees will be even wider.

This is a classic example of giving to those that have and taking from those who have not. It is just worth contemplating the opposite policy which would be much more equitable across the ages though I recognise it is not realistic. This would recognise that a final salary scheme was very generous and attractive to employees. They were extremely expensive to provide but the aim would be that everybody should have an opportunity of, say, 20 years’ worth of final salary pension. Instead of that, in both the private sector and the public sector the model is exactly the opposite – if you have already got final salary pension rights you keep on accumulating them and if you haven’t got any yet then there is no chance of getting them in the future. This is a peculiarly inequitable way of tackling the pensions crisis, but as it’s the young who lose out, there is a strange silence about their plight.

Housing

Let’s now turn from pensions to the biggest single form of wealth that people have – their housing. After his unhappy experience with pensions over the past week - or rather the past eight years – I expect Gordon Brown will wish to shift our attention to housing in his Autumn Statement next week. He will try to do so because here the story appears much better. Housing is the most widespread and democratic wealth ownership – one of the reasons why the Conservative Party’s belief in home ownership is such a powerful part of our commitment to a property owning democracy. More than 70% of adults are home owners – a higher percentage than could ever dream of a funded final salary pension, for example. Council house sales, lower mortgage rates, and the rise in the value of housing have all made this most democratic form of ownership a much higher proportion of people’s total wealth than it ever has been before. It is not just that the value has gone up, the number of home owners continues to rise as well. That is why Gordon Brown is proud of boasting that there are now 17.8 million home owners against 16.3 million in 1997, or indeed 15.1 million in 1990. So the rise in the importance of housing in our total wealth also spreads wealth more widely. But the story is not as good as it appears.

Much of the rise in home ownership is a demographic artefact – a consequence of the demographic bulge as the baby boomers age. Imagine that owner occupation amongst 35-55-year-olds remains stable at 75%. As the baby boomers reach middle age there is a big increase in the absolute number of 35-55-year-olds. This would show up as an increase in the absolute number of owner occupiers but without any real change in patterns of home ownership. It is this demographic change that lies behind much of this apparent increase in home ownership. Imagine a society with lots of men born 50 years ago and not many born 30 years ago. That would show an increase in male baldness. But not because of any change in follicle behaviour – just because of a demographic change. The same goes for the increase in home ownership.

There is a further twist to this as well. We are seeing not just an increase in the total number of middle-aged people but an increase in the proportion of them who are owner occupiers. And sadly, one of the main reasons for this is relationship breakdown. Imagine that a husband and wife split up. He moves out and buys a flat of his own. That is an increase in owner occupation. In fact the housing economists calculate that for every owner occupied household which breaks up 1.4 new owner occupiers are created.

Of course the partner who moves out might not buy a new place straight away. He – or she – might rent for a while. You count as a first-time buyer if you were not in owner occupation immediately before you bought. So the middle-aged divorcee who buys after renting for a time will count as a successful first-time buyer in Gordon Brown’s statistics. I have been trying to get to the bottom of these figures. My rough estimate is that 1/2m out of the 1.5m increase in owner occupation since 1997 can simply be attributed to relationship breakdown. Next time you hear Gordon Brown tell you how many new owner occupiers there are, he might give the impression that he is celebrating the success of the 25-year-old in becoming an owner occupier. But in reality it is just as likely that the statistics are telling us that the 25-year-old’s parents have split up and ended up as two separate owner occupiers instead.

Even here we can see more social change driven by shifts in pension and housing wealth. Traditionally when a relationship broke down the woman would stay in the original house and the man might leave to set up on his own, taking his pension rights with him. Now it is much more likely that the pension rights will be split between the two partners. But as the family house is worth much more it is also more likely to be sold and each partner to move into a new smaller property. It is one of the many ways in which changes in our pattern of wealth are impacting on the way in which we live.

I hope I have helped explain to you why we can both have increases in the total amount of owner occupiers on Britain whilst at the same time the younger generation are finding it harder to get started as owner occupiers than ever before. The median age of a first-time buyer is up to 30. In fact the mean age for a first-time buyer is now up to 34, but that is distorted upwards by the middle-aged return to owner occupation. In 1985 34% of under 25’s were already home owners: this had dropped to 22% by 2003. Among 25 to 29-year-olds owner occupation rates are down from 62% in the mid-80’s to about 52% now. Kate Barker’s Report shows that affordability is now a big problem – in 2002 only 37% of new households could afford to buy a property compared to 46% in the late 1980’s.

Amongst young people home ownership is an aspiration as strong as ever but one that seems harder and harder to fill. There is a fortunate generation of baby boomers who got into the housing market in time to enjoy the enormous appreciation of the past 15 years but it is going to be a longer, slower, and more painful process for the younger generation to achieve home ownership.

Comparing the generations

Now that we have briefly analysed the three main forms of wealth that individuals possess, a very clear picture has emerged. Think of a snapshot of Britain today with people from three generations – a 75-year-old, a 50-year-old and a 25-year-old.

The 75-year-old probably didn’t build up much of a company pension and may well have rented a property through his or her life. They are unlikely to have much wealth. They are quite heavy users of public services such as the NHS. They are quite likely to be dependent on means-tested benefits as well. They are the prime beneficiaries of increases in public spending.

The 50-year-old is very likely to be a member of a good occupational pension scheme. Their house has shot up in value and they are now at the stage where they might well be saving money on top. They have been blessed with some incredibly favourable economic and demographic trends.

Then there is the 25-year-old. He or she has had to pay for the university education which the 50-year-old enjoyed for free, so they have just started work with a large amount of student debt. There is no way that as a new employee they are going to have any rights to a decent company pension scheme. Although they still aspire to own their own home it is going to take ages to build up a deposit that will even get them into the small flats that the Government is driving builders to put up. There is a fundamental issue here of equity across the generations.They might well feel that conventional politicians don’t really understand their plight or have much to offer them.

In the past few years economists have been developing what they call generational accounting which tries to capture the net shifts of resources between different generations. The Treasury, to their credit, claim to have pioneered generational accounting in their estimates of long-term fiscal trends, but I’m afraid I don’t believe their figures which have deeply implausible assumptions. Nevertheless, it is a very useful framework for looking at many economic issues - the growth of public borrowing under Gordon Brown, for example. He is shifting the burden of paying for today’s public expenditure on to the next generation. As future tax payers they will be burdened with Gordon Brown’s public debt as much as they will be burdened with their own student debt.

The exploration of these connections between the generations goes way beyond economics. The difficulty of buying a house and creating a nest means that family formation is delayed. This in turn means that people have children later, and they will have fewer children. It is no accident that the British birth rate fell successively every year from 1997 to 2003 as house prices rose and so did the average age of the first-time buyer. Families are under pressure in other ways. If you go to Euston station on a Friday afternoon you will see the phenomenon of the weekly commute of people who work in London during the week and live hundreds of miles away. For many that is the only way they can afford somewhere decent to live. Hence the new phenomenon of the LATs – people who live apart together. The other option could be a cramped bedsit in one of London’s dingier quarters. Overcrowding or life apart from your partner or family, these are the choices being faced by many of today’s young people.

You can see the same thing in macro-economic policy too. Inflation has its own impact on the distribution of income. Inflation works as a very effective device for wiping off the debts of people who have borrowed a lot, to buy a house for example. So the baby boomers who were buying their houses in the 80’s and 90’s haven’t just seen the value of their house rise, they have also got a mortgage that inflation could well have shrunk to a fraction of its former size in real terms. Now they are beginning to look to retirement when quite possibly their income will be fixed in money terms. So now what they want above all is price stability. But meanwhile, for the younger generation, trying to borrow to finance a house today, our new low inflation environment means that the borrowings they take on are likely to be almost as burdensome in twenty years’ time as they are now. It is all well and good moving to a low inflation world but it is very convenient for the baby boomers that it has been achieved after their debts have been effectively written off.

There is a lot of comment about how the baby boomers are continuing to shape the cultural environment around us. One of the advantages of being a big, prosperous generation like that is that your music and your cultural tastes carry on being celebrated – you can still go to Rolling Stones concerts, get Beatles CDs, and drive trendy versions of the Volkswagen beetle and the Mini. But it is not just that baby boomers have shaped the cultural environment, they have also shaped an economic and social environment that works for them very well. A young person could be forgiven for believing that the way in which economic and social policy is now conducted is little less than a conspiracy by the middle-aged against the young.

What it means for the future

There is a challenge here for all Parties. I believe that we should put fairness across the generations as the centrepiece to our approach for spreading ownership, to reforming our pensions, and to better policies on housing. It is a powerful appeal to fairness - preoccupied not with social class, but instead, looking at the fair distribution of income and wealth from one generation to the next. The challenge for the Conservative Party is to show that we are not just the Party of possession but also the Party of opportunity.

So let me end by trying to sketch out how the Party might carry forward such an agenda. We have already been at the forefront of thinking about how to tackle the pensions crisis. We went through exactly the same argument that Adair Turner is likely to develop in his Report this week. We need to encourage people to save more. But one of the big obstacles, especially for young people and people with modest earnings is that saving now is likely to trap them in means-testing when they are pensioners. So they face a minimum rate of benefit withdrawal of 40% and quite possibly as high as 91% if they have built up some pension savings of their own. That is why we went into the last election committed to increasing the basic state pension by earnings not prices so as to reverse spread of means-testing. It doesn’t just offer a better deal to today’s pensioners, it is above all a policy aimed at encouraging today’s working generation to save for the future. That is why Adair Turner was driven ineluctably to recognise that you couldn’t look at how to encourage private saving without also reforming the system of state benefits.

We have gone further and proposed new incentives to save on top of benefit reform. It is pretty heroic asking a 25-year-old to set aside money for a pension that he or she won’t be able to touch for many decades. This is asking them to climb an Everest of saving when they might well still have student debt to pay off and want to build up a deposit to put down on the first house. That is why we have proposed a Lifetimes Savings Account, it makes it easier for people to build up money with a reward alongside. Malcolm Rifkind has taken this thought further with the imaginative proposals in his Private Members Bill for making saving much more flexible. It is absurd that we are in the world where it is very easy to borrow and very hard to save. Mechanisms for borrowing have been transformed over the past 10 or 15 years and they are far more flexible and adaptable than they used to be. The challenge is to make saving as easy and flexible as well. The Conservative Party has already got a lead here and we must build on it.

As well as pensions, we also need to look at how we can encourage wider home ownership. As Gordon Brown buries the Turner Report he might try, by way of compensation, to disinter Kate Barker’s Report on housing. We can look forward to a lively debate about how we can tackle the affordability crisis and help younger people into the housing market. Here I have to say that you at Policy Exchange have made a massive contribution to the debate with the excellent work by Alan Evans and Oliver Hartwich. There are some really interesting ideas here. As the Conservative Party looks at more and more areas where we can break up centralised Whitehall control, then the planning system must be a candidate. If central controls were to go we would need a better balance of local incentives and rewards instead. Here, the work at Policy Exchange on how local authorities could enjoy the economic and revenue benefits of allowing development in their areas is a really imaginative and interesting way forward.

I believe that this issue of equity across the generations is potentially an enormously powerful theme through British politics. Tony Benn used to talk about achieving a fundamental shift of power and wealth to working people. In reality the pensions crisis, the housing boom, and the cycle of inflation and disinflation have shifted power and wealth to the baby-boomers. It will be a crucial economic, and indeed ethical test for that generation to give their children and grandchildren the same opportunities we have enjoyed. So far we are failing that test.”