IPOD generation: government failing to learn lessons

The think tank Reform has released an updated version of its important report on the IPOD generation. This time, it focuses on government policies, or lack of them, to deal with the central problem that young poeple are facing - higher taxes to deal with an ageing population, but no guarantee that they will not have to provide for themselves when they reach retirement age.


The report argues that much of the developed world is facing up to the demographic challenge:

"The developed world is facing an unprecedented demographic change, as the “baby boomer” generation moves into retirement and the ratio of working age people to retired people falls sharply. Politicians will face temptations to increase entitlements to healthcare and pensions; but these will place an unfair burden on the smaller numbers of young people.

"The OECD brought together the global discussion in its latest Economic Outlook. It argued that most developed countries must make urgent structural reforms to contain future spending on pensions and healthcare. If such changes are not made, the higher spending will necessitate higher levels of borrowing and debt – reducing investment in a manner described by the OECD as “explosive” – or higher tax burdens, undermining economic growth.

"The right policy response is to rein in public spending. The best means to do this are fiscal rules that include explicit expenditure targets. 11 OECD countries now operate an expenditure target.

"The policies outlined by the OECD are now under active discussion in many countries, with the best policy discussion taking place in the USA. Arguably the most important global policy maker is the Chairman of the Federal Reserve in the USA. Ben Bernanke made intergenerational fairness the central theme of his outstanding presentation to the Senate Budget Committee in 2007 (included as an Appendix to this report). His predecessor as Chairman, Alan Greenspan, also singled out the demographic issue in his recent autobiography, warning that “almost all of the developed world is at the edge of a demographic abyss for which there is no precedent”."

Unsurprisingly, Gordon Brown's Britain is singled out for criticism:

"The policies which have tipped the tax / spend balance against young people – higher health and pensions entitlements and higher public spending overall – have remained in place. And the specific decisions of both the Pre-Budget Report & Comprehensive Spending Review (PBR & CSR 2007) and Budget 2007 have actually worsened the situation.

"PBR & CSR 2007 pledged major spending increases on both healthcare and state pensions. NHS spending will increase from £90 billion to £110 billion (cash terms) by 2010-11. State pensions will increase in line with earnings from 2012, or at the latest from the end of the next Parliament...

"In 2012, a typical grduate will face an effective tax burden – including near compulsory payments on higher education and pensions – of 49 per cent."

The solution? Spending control, tax reductions and education reform:

"a new concept for economic policy making – the “investment margin”, which measures the resources available to individuals to spend on training, healthcare and retirement;

"a “Growth Rule” for public spending which would deliver a rate of public spending of 35 per cent – the level of Ireland and Australia – within two Parliaments;

"co-payments for healthcare. This is realistic given the high net worth of the baby boomer generation;

"targeted tax reductions, with one option being a much higher income tax personal threshold of up to £15,000; and

"education reform based on choice and supply side liberalisation."

Quite right. And something to be done on public sector pensions too.

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