The Institute for Fiscal Studies (IFS) has issued a report that states that many people born in the 1960s and 1970s will be poorer overall than their parents – putting an end to the post war trend for each generation being better off than the last.
With the lack of pay rises, dwindling home ownership, poor pension savings and lack general savings many people are being forced to rely on inheritance for them to be able to live comfortably for the rest of their lives.
People born in the 1960s and 1970s have been hit hard by stagnating wages over the past ten years. They benefited from an income growth in 1974 and 2002 when median income rose by 1.5% a year, however the IFS did point out that this growth was disproportionate because the highest incomes grew at a much faster rate than the lowest. Since 2002 median incomes have grown by only 0.1%, affecting those born in the 70s who were on average incomes of £570 a week by the time they reach 40 compared to £610 for those born in the 60s. Their parents did not have this problem with wage stagnation at a similar age so they benefited from decent income growth up to the 1960s. Following the financial crisis in 2008 the IFS found that future income prospects for the 1960s and 1970s cohorts ‘do not look good in the short term future either, or arguable even in the medium term’.
Property is the biggest asset that the majority of individuals accumulate in their lives – it is also an indicator of the overall wealth of different generations. There is a difference between those born in the 60s who tended to get on the housing ladder earlier compared to those who were born in the 70s. For the people born in the 40s and 50s, homeownership rates peaked at about 80% by the age of 50, the IFS has said it is unclear whether this will be the case for those born in the 60s. People born in the 70s have been affected more by falling incomes, the boom in property prices in the 1990s up to the mid 2000s and also by saving less money. People aged between 37 and 43 are now lagging behind those 10 years older than them – by age 35, 66% born between 1970 and 1976 owned a home, compared to 71% of those born in the 1950s and 1960s.
Those born in the 60s and 70s were more likely to be a private pension saver in their 20s and 30s than their parents – the IFS puts this down to the introduction of personal pensions in the 1980s. But the report states that a ‘rapid switch’ away from well funded company pension funds has hurt those born in the 60s and 70s where their parents will have benefited. The younger generation born after 1980 are the ones who will be taking the biggest hit in terms of workplace pension saving, this is because they have been most affected by the closure of the gold-plated final salary schemes in the private sector over the past 15 years. In 1997, defined benefit pension schemes accounted for 74% of private sector pension plans, now they comprise just 29% of the total, and continue to be displaced by less generous defined contribution schemes.
The state pension system peaked for those born in 1933, at this age people got the best out of the State Earnings Related Pension Scheme (SERPS) which provided a top-up to the basic state pension and was introduced in 1978. People born in the 1960s and 1970s will be taking their pension under the new single-tier rules that will be introduced in 2016, giving people a flat-rate expected to be around £155 a week. The IFS found that higher earners born in the 60s and 70s will find this new state pension will not cover as much of their working income as their parents (born in the 30s and 40s), though lower earners will only get slightly less than those born in the 1940s and more than those born in the 50s. The rising state pension age will ‘stop the rise in generosity’ of the state pension system as would have happened had the age remained the same and life expectancies continued to grow.
Those born in the 70s particularly preferring to spend rather than save. The IFS has found that those who saved the same proportion as their parents during the years before 2002 would be ‘left with higher stocks of wealth’ because of their higher incomes during that time. However this is not the case if these people chose to spend rather than save when they were young adults – the report found that these people saved less than their parents had with a savings gap as high as £60 a week between those born in the 1940s compared to those born in the 1970s at the same stage in their lives.