The political row over falling living standards in the UK was stoked on Tuesday as it emerged that earnings-squeezed and pension-poor Britons born in the 1960s and 70s need inherited wealth to be better off in retirement than people born in earlier decades.
After an autumn in which the cost of living has dominated Westminster debate, the Institute for Fiscal Studies (IFS) said its research showed the days when each generation could expect to be better off than their predecessors might be ending.
The in-depth survey of people born between the Battle of Britain in 1940 and the arrival of Margaret Thatcher in Downing Street in 1979 found that a decade in which real incomes have stagnated – coupled with changes to pensions and high house prices – has made life tougher for people currently in their 30s, 40s and early 50s than those born earlier.
The IFS said living standards for those currently considered to be in the prime of their working lives were now dependent on wealth passed down the generations, and that this was heavily skewed towards the already better-off.
Andrew Hood, a research economist at IFS and an author of the report, said: "Since the second world war, successive cohorts have enjoyed higher incomes and living standards than their parents. Yet the incomes and wealth of those born in the 1960s and 70s look no higher than the cohorts who came before them. As a result, younger cohorts are likely to have to rely on inheritances to be better off in retirement than their predecessors."
Hood said the IFS had not yet studied what sort of retirement might be expected by those born in the 80s and 90s, but there was nothing to suggest the outlook had improved.
The main findings of the IFS report were: • Since the war, steady growth has meant each generation had higher incomes and living standards than the one before.
• Those born in the 60s and 70s are less likely to own a home.
• The trend stalled in the past decade, with individuals born in the 60s and 70s having the same take-home pay as workers born a decade earlier.
• The children of the 60s and 70s had higher incomes during early adulthood than their predecessors but spent the extra.
• Compared with those born in the 40s and 50s, they are likely to have smaller private pension pots and will find that the state pension replaces a smaller slice of their earnings prior to retirement.
The IFS said: "The main conclusion is that individuals born in the 60s and 70s are likely to be reliant on inherited wealth if they are to be any better off in retirement than their predecessors. Many more people in younger cohorts expect to inherit wealth; but expected inheritances are distributed unequally and are higher for those who are already wealthier. The results suggest that the rapid improvement in economic outcomes across birth cohorts that we have seen in recent decades may be coming to a halt."
In recent weeks, political parties have traded blows over the cost of living, with Ed Miliband making it the focus of his attack on the government. George Osborne last week said Britain was poorer because of the financial and economic crisis of 2007-09, when Labour was in power.
A government spokesman said: "The only way to raise living standards is to raise productivity by continuing to implement the economic plan that has got the economy growing, created 1.4 million new private sector jobs and cut the deficit by a third.
"As part of this plan, we are committed to protecting pensioners, who have worked hard all their lives, to ensure their dignity in retirement.
"In addition to introducing the triple lock on the basic state pension, we have also protected a number of pensioner benefits – for instance, free bus passes and TV licences. We are reforming the UK's state pension system to be more sustainable for the future and widening access to a workplace pension. These combined reforms will improve the incomes of 9 million people currently facing inadequate income in retirement." But Angus Hanton of the Intergenerational Foundation said: "This report shows rapidly growing intergenerational imbalances where younger generations face soaring costs of housing and education while receiving lower earnings and pensions, contrasting with the relative prosperity of older generations.
"Policymakers should not equate old age with need. They are protecting older, wealthier generations while stripping benefits from families and young people."
The thinktank said many of the factors adversely affecting those born in the 60s and 70s were the "straightforward consequences" of recent trends.
After strong growth in the 80s and 90s, real incomes are no higher now than they were a decade ago and were growing only weakly even before the financial crash. Over the same period, companies have made a rapid switch from final salary pension schemes to less generous defined contribution schemes in which younger workers have been accumulating less private pension wealth.
"Policy changes – themselves often driven by the inevitable fiscal pressures associated with an ageing society – explain the key changes across cohorts in state pension entitlements."
The IFS said more research needed to be done into why those born in the 60s and 70s "spent all, and saved none, of the additional income that they had in young adulthood relative to their predecessors".
"Inheritances look like the major potential reason why the later economic position of cohorts born in the 60s and 70s could yet turn out better than that of their predecessors, on average. Only 28% of individuals born in the early 40s could expect an inheritance, but that rose to 70% for people born in the 70s.
The study found that of those born in 1972-78, 78% of the wealthiest third and 45% of the poorest third expected a future inheritance, while 35% of the wealthiest third and 12% of the poorest third expected a future inheritance worth at least £100,000. "Expected future inheritances also tend to be concentrated within the same households: individuals expecting inheritances are far more likely to have partners who also expect them.
"In combination with the lack of positive signs with respect to other economic indicators, this suggests that the economic fate of the 60s and 70s generations may be relatively dependent on the fortunes of their parents. But the prevalence and value of expected future inheritances are distributed unequally, with households that are already relatively wealthy far more likely to benefit."
The IFS said that during their early adulthood, those born in the 60s and 70s enjoyed much higher take-home incomes than previous generations at a similar age.
At 30, the real median income for someone born in the 70s was 20% higher than someone born in the 60s, 52% higher than that of someone born in the 50s and 77% higher than for someone born in the 40s.
"These income differences between birth cohorts at younger ages were (at least) matched by differences in spending", the IFS said. "As a result, the 1960s and 1970s cohorts had higher living standards during early adulthood than their predecessors had, but they have not actively saved more take-home income than their predecessors had by the same stage in life."
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