A Tonic for Millennials’ Pensions Gloom

It seems that Millenials have been getting rather flustered on Twitter in response to the FT’s suggestion that they should save £800 per month if they want to get a decent pension. With the median gross wage for 22-29 year olds at around £21k pa (translating into a take-home pay of £17,500 pa) you can see why telling them they’re stuffed if they don’t save £9,600 pa might get them annoyed. So I thought I’d try to cheer them up.

About 12 years ago – when I was 28 – I went to an event in Cambridge hosted by John Eatwell at which a young Ed Balls answered questions about his career etc. Balls was excellent – engaging, articulate, and erudite. I was extremely impressed by this Number 11 SPAD and did what many young folk do in such situations: I sought to show off. So I assembled and delivered a long and pointed question about the forthcoming pensions crisis. I’d read a bunch of papers and books on the subject and so thought I knew my stuff. As such the speech I reeled out was more like a verbally-delivered data-laden op-ed than a question really – you know the type. I was *that* ridiculous idiot.* Anyway, before Balls could respond Eatwell jumped down my throat, basically telling me that I didn’t know what I was talking about and referring me to a paper he’d written. I’m glad that he did because the paper was very good.

Eatwell’s very short pensions paper contains some very very basic ideas that are so simple that they are frequently lost in plain sight. I would summarise them as follows (although do read as it has a bit more than just this):

  1. A pension pot is an asset;
  2. An asset is a claim on someone else;
  3. That ‘someone else’ – for the cohort as a whole – can only be non-pensioners;
  4. From a macroeconomic perspective that does not incorporate either distributional outcomes across income groups or differing efficiencies of state versus private investment, and implicitly assumes medium -term current account balance, unfunded pay-as-you-go state pensions and pre-funded private defined contribution pensions are identical: they are both just claims on non-pensioners.

Or to put it another way, pensioners will collectively consume output produced by the young. Money, as always, mediates – and so in place of ‘consume output produced by’, read  ‘receive income from’. Pensioners will receive an income that can come only from non-pensioners. This income could be in the form of rent, dividends, and interest only from the young, or the proceeds of asset sales made only to the young. This income could be in the form of tax transfers only from the young. Or some mixture. It was ever thus and it will ever be thus.

And so society has a choice as to what level of income pensioners should collectively receive, and how this should be distributed.** Society today includes an ever-swelling portion of pensioners. The two really big variables here that determine aggregate pensioner consumption are: 1) the collective output of the young (of which pensioners consume some slice); 2) the size of said slice. There is the (sizeable) issue of inequality among pensioners of course, but let’s park that for now.

When we move on to the pensions that millennials might prospectively receive, the two key variables determining their collective pensions will be: 1) the collective output of folks not yet born (that they will have to breed or import); 2) the size of the slice that they can persuade their unborn spawn to part with. Saving £800 per month might be one strategy to build a claim on the millennials’ unborn spawn. It doesn’t seem  bad one if they are to be raised on the inviolability of property rights and the societal necessity of monetary stability, but I’m not sure that millennials have their parenting strategies planned out that far yet.

For my part, I am doing my best to busily follow the FT’s pointers and accruing claims on millennials’ future economic output so that I can claim a decent slice of it when the time comes to hang up my boots. But I’m hedging my property rights bet by being nice to millennials.


UPDATE: Ben Southwood (@bswud) from the Adam Smith Institute has written this reply. Do read it.

* I groan every time I hear someone do this now, in the shame-filled knowledge that I was once (perhaps a lot more than once) *that* guy.

** The choice can manifest in level of state pension, tax treatment of unearned income, capital gains etc.