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.


12 thoughts on “A Tonic for Millennials’ Pensions Gloom

  1. “An asset is a claim on someone else”. No, an asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Since assets can be tangible & intangible, domestic & foreign, it does not mean that UK pensions and workers are enacting a zero-sum game as implied here. What if my asset is land in the US that I rent to a US oil company providing me with income, and thus my (working) children in the UK with gifts to help pay their student debt, and also provide jobs in the US? How is that a “claim” on non-pensioners?


    • Thanks for taking the time to comment. You’re also right that there is nothing to stop individuals acting in a way that confounds this description of the collective cohort.
      You are also right that in specifying ‘medium-term current account balance’ I sought to simplify and present the issue as if we were in a closed economy. Only at a global level do we truly operate in a closed economy.
      So there could very well be a situation where future pensioners accrue claims on foreigners (presumably by running large and persistent current account surpluses). Given that the UK has been running a persistent current account deficit and that its Net Intl Investment Position is estimated by the ONS as -£450bn (ie, a negative c25% of GDP) I’m probably guilty of anchoring: just because what you say is a world away from today’s state of affairs in the UK there is nothing to say that this will be the case 50yrs from now.


  2. ‘Zactly!!!

    For the baby boomers to retire, someone somewhere has to produce all the goods and services they need to live. Otherwise, the size of your pension pot is pretty irrelevant, as you can’t eat it per se.


  3. I don’t think it is correct to ignore inequality among people of pensionable age

    Looking back in time a small minority of pensioners had final salary pensions from the state or big corporations and a large number of people had a mish-mash of very little private pension savings at all

    I did glance at a ONS wealth and assets survey using data from 2011 or 2012 which I recall showed this was very much the case in the current generation of pensioners and people coming up to retirement

    There doesn’t seem to be any basis to expect inequality in pension savings in future generations of people of pensionable age to improve

    You could argue that the state will step in and save this huge cohort of people with little private pension savings, but in an ageing society there will be less ability for the state to top up pensioner incomes from general taxation, unless the state chooses to extract that money from the wealth of these other, few in number, wealthy pensioners…which assumes they will allow themselves to be taxed (unlikely if you ever read the personal finance section of the Daily Telegraph)


    • Thanks for commenting.
      You are certainly right that it is incorrect to ignore inequality amongst pensioners. It’s just that it is such a huge topic that I left it to one side to focus on the aggregate age-cohort angle as I thought that this was the area that could be of greatest interest for a very short post.


  4. I think this article is ridiculous. A pension is a byproduct of past labor that has been earned.
    You might just as well say that all skyscrapers should immediately disappear because none of them
    have been created in the future. A pension holder is like a bond holder who has purchased an agreed upon claim to future cash flows. It is important that young as well as old develop a respect for the right to claim future cash flows thru current labor, without which much of the labor of both young and old would become meaningless. The problem with pensions, social security and the like, is that those responsible for making the promises either over-promise, or use the principal for some other purpose, and then hold their hands up in the air like magicians who have made something disappear. People who make promises about future cash flows must be held accountable. Old people, and young people, should receive what is their due. Pumping up young people into a malice against retirees is not merely nasty
    to those who have spent their lives productively, but encourages the young to betray their future selves.


    • Thanks for the comment and I’m sorry you didn’t like the post but would reject the notion that it is pumping up young people into malice against retirees.

      I don’t disagree with the underlying sentiment that relationships between people (as well as demographic cohorts in aggregate) are mediated through contractual relationships which carry monetary value – the durability of which facilitate contemporary society. Money (as well as monetary wealth embodied in securities) is – if you like – the reification of society, and that’s why I find it so fascinating.


  5. While what you say is correct on the macroeconomic level, most individual millennials are only interested in the very microeconomic level of their own retirement. And since most people are not in fact saving £800 per month from the age of 20 then anyone who does so can gain a much bigger share of the collective claim on the younger generation. Which is all they need to know.


  6. Isn’t the (parked) issue of pensioner inequality actually the main point as far as individuals are concerned?

    If you save up through your working life and invest wisely, you have some control over when to retire and what your level of income in retirement will be. No persuasion required. If you don’t, you’re reliant on whatever current taxpayers (represented by the government) decide to give you.

    As an individual I don’t particularly care about whether or not the pie is the same size: I just want to control the size of the slice I get, and I suspect that the slice given as a basic minimum will decline and be given ever later. Therefore saving £800 per month is always going to be better than not doing so.

    I feel like I’m missing a fundamental point somewhere, but what?


  7. Some of the previous comments show that many savers didn’t get that their claim on future cash flows rely on the presence of those flows in the future regardless of how much work they may have done to accumulative those claims in the past via savings.

    The one exception that came to my mind is the accumulation and subsequent draw down of inventory. For example, savers could use current income to stockpile aluminum/iron/potatoes and then consume those stocks during retirement. Terrible idea in a positive rate world and storage costs likely overwhelm any reasonable negative rate one either but the only theoretical exception I could think of to your piece.


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