Class of 2005: the IPOD generation

The aim of this report is to review the impact of tax, public expenditure and higher education policies on young people under 35. The research outlines the economic position of the young, and explains how this constituency has been unfairly burdened both by the actions of successive governments and by a general unwillingness to assess how policy decisions affect the financial prospects of the younger generation.

The common perception is that today’s young people have it easy. With cheap travel, liberal social mores and the benefits of a consumer technology revolution, it might be said that Britain at the start of the twenty-first century is a great time to be young. But the picture described in this report suggests that this view is misplaced.

The balance of taxation and public spending has tilted against young people so that they now face an unfair burden. Key reasons for this change include:

– An ageing population, forcing young people to support a much greater number of pensioners. The impact of this change will be felt in as little as five years from now.

– Unprecedented recent spending increases on the NHS, very largely used by older people.

– The introduction of tuition fees for higher education.

– The reduction in the real value of the basic state pension in the long term.

– Effective tax increases in regard to stamp duty and inheritance tax (which also make it more difficult for young people to share in rising housing equity).

Taken together, these changes amount to the end of the welfare bargain. Direct and indirect taxes amounting to 35-40 per cent of income used to “buy” income in old age and free or highly subsidized higher education as well as access to free health services. Now the tax take is the same but there will be much less in return. People under 35 could be described as a cross-over generation who are paying the cost of the welfare state without being able to expect many of the benefits.

The increasing burden of taxation and co-payments is being faced by young people at a time when their economic profile is already difficult:

– The average debt of higher education graduates now amounts to £13,500 and is expected to rise to £20,000 for undergraduates starting this year.

– Levels of entrepreneurship among young people are much lower in the UK than in the USA, Australia, New Zealand and Ireland and have fallen in this decade.

– Labour market competition is much stronger than in previous generations, including competition from overseas. In 1961, there were less than 200,000 undergraduates in higher education. Now, there are nearly 1.6 million.

– Young people are finding it more difficult to acquire housing equity. The average age of first time buyers has risen to 34 from 31 in 1984.

– The proportion of 20-24 year-olds living with their parents has risen from 41 per cent in 1991 to 49 per cent in 2004. For 25-29 year-olds, the increase has been from 14 per cent to 18 per cent.

– The earnings of 18-29 year-olds have risen by three times less than those of 30-39 year-olds since 1998. 56 per cent of 2002 graduates were financially dependent on their parents three years after graduation.

For a minority of young people – the so-called NEETs (Not in Education Employment or Training), amounting to 10 per cent of 16-18 year-olds and over a million 18-24 year-olds in total – opportunities remain extremely limited. Social mobility is falling.

A key factor undermining young people’s economic position is the falling return to higher education. While the huge expansion of higher education, has certainly increased educational opportunity, it has also greatly increased competition in the labour market and reduced the economic benefits of a degree:

– When justifying the introduction of tuition fees, the Government publicised a study which found that graduates would enjoy an earnings premium over their working lifetime of £400,000 over their peers with two A-levels who did not enter university. The latest research estimates the premium to be only around £140,000 for men and £160,000 for women.

– There is a wide variation in economic benefit between courses and universities. Male graduates in maths and computing, for example, will gain over £220,000 in lifetime earnings but male arts graduates will gain less than £25,000. Degrees from new universities provide a lower return.

– Other academic research indicates that graduate under-employment is a growing problem. Three years after completing their degree, 40 per cent of graduates are underemployed. The majority of members of the Graduate Employers Association believe that the UK is producing too many graduates.

– For certain public sector jobs, such as primary school teachers, government has attracted more students than there are jobs available.

As well as NEETs, discussion around this theme has thrown up the ideas of KIPPERs (Kids In Parents Pockets, Eroding Retirement Savings), YADS (Young And Determined Savers) and SKIers (Spending the Kids’
Inheritance). A better name for today’s young people is the IPOD generation: Insecure, Pressured, Over-taxed and Debt-ridden.

The true position of young people is thrown into stark relief when compared to that of their parents, the so-called “baby boomers.” Born between 1945 and 1960, the parents of young people have enjoyed many advantages of which the younger generation can now only dream, including a generous welfare state, free universal higher education and final salary pension schemes. In addition, they have enjoyed a substantial rise in housing equity that has augmented their lifetime savings and will benefit from recent increases on public spending on the NHS.

The prospect of an ageing society is nothing new. But since young people are key contributors to economic growth and the enterprise culture, a clear view of the burdens they face is necessary to create the conditions for future prosperity.

Policies in the years ahead must be considered through the prism of intergenerational fairness and, where it is obvious that the welfare bargain has broken down, practical solutions must be pursued now, while the situation is still manageable.

The wrong way to redress the intergenerational balance would be to increase welfare benefits for the young, for example by abolishing tuition fees or increasing the state pension, and increasing taxes on the older population. A recent study indicates that the additional cost to a 40 year old of such an approach would amount to an increase in income tax payments of a third from now until death. Such an approach would increase the tax burden on young and old alike and undermine economic growth which is the real provider of security and opportunity.

The correct solution will include increasing choice and opportunity for the young and spreading the costs of public services. These will include:

– Reductions in the tax burden. The economic situation of young people makes a strong case for reductions in average tax rates.

– Control of public spending. If the overall tax burden is to be brought down, levels of public spending in the long term will need to reach a manageable level. This need will be even more urgent as the proportion of retirees increases and if reforms to state pensions remain unrealised. Reform‘s Growth Rule – that spending by government departments should increase by two per cent less than the trend rate of GDP for at least two Parliaments (detailed in the 2005 publication Manifesto for Reform) – would be one measure to provide the savings necessary over time to lower the tax burden.

– Extension of co-payment in public services including health. The principle of co-payment in higher education is right and the cap on tuition fees should be lifted, with the result that young people will make better decisions about the overall benefit of higher education to them. But tuition fees are a burden that the young will largely carry alone. Greater co-payment in other services, such as health, will help to equalise the burden between generations and also make services more responsive to their users.

– New incentives to save. The young are already beginning to take charge of their own financial prospects, but moves to encourage a new savings ethic throughout the whole population would be welcome, especially with a move to full co-payment in higher education.

– Abolition of the access target in higher education. The Government’s target of 50 per cent of young people in higher education by 2010 has distorted the marketplace and worsened the financial position and economic prospects of thousands of students. It should be abolished as a precondition for allowing the rebalancing of the employment sector towards the skills that the economy needs.

The cumulative effect of refusing to assess the impact of government policy on the economic position of young people has been to create a fragmented policy-making environment in which the needs of young people are overlooked and all too often dismissed. The role of political parties must be to open up a debate on the future implications of fiscal, education and housing policy for the younger generation, without the tendency, seen at the last election, to ignore the young in favour of policies for pensioners and those more likely to vote.