The FT has reported this morning that:
The earnings of recent English graduates have deteriorated so rapidly since the financial crisis that the latest class is earning 12 per cent less than their pre-crash counterparts at the same stage in their careers. They also owe about 60 per cent more in student debt.
And as they added:
Tuition fees in England almost tripled last year to a maximum £9,000 a year.
This worries me, a lot. I worry for those in this situation. I worry about what it does for their sense of well-being. I worry about it economically.
But as much I worry for the sheer economic illiteracy of this. Currently student debt belongs to the government: no state cash has really been saved by imposing massive burdens on the young: it has just been an additional tax on them. But in the process something as important - what I call the fundamental pension contract - has been ignored. I wrote about this a couple of years or so ago in a report called 'Making Pensions Work', where I said politicians had:
ignored the fundamental pension contract that should exist within any society. This is that one generation, the older one, will through its own efforts create capital assets and infrastructure in both the state and private sectors which the following younger generation can use in the course of their work. In exchange for their subsequent use of these assets for their own benefit that succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement. Unless this fundamental compact that underpins all pensions is honoured any pension system will fail.
As I then argued of private pensions:
This compact is ignored in the existing pension system that does not even recognise that it exists. Our state subsidised saving for pensions makes no link between that activity and the necessary investment in new capital goods, infrastructure, job creation and skills that we need as a country. As a result state subsidy is being given with no return to the state appearing to arise as a consequence, precisely because this is a subsidy for saving which does not generate any new wealth. This is the fundamental economic problem and malaise in our current pension arrangement.
I remain convinced that this is true. Baby boomers will ultimately pay for this. As the FT notes:
These are the young people to whom the country will turn over the next 20 years to fund the retirement of the “baby boomer” generation. Britain's ageing population is forecast to put the country's public finances under increasing strain.
The trouble is we have shafted them. What's to stop them returning the compliment?
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One can only shake one’s head. To expect the mean comparative salary level when 40-50% are graduating to be the same as that when only 10-20% did was always impossible. Inevitably more with degrees in a typical labour market would mean that many would be in jobs that hitherto did not require degrees. At one time most teachers had diplomas or such. When it becomes wholly graduate it does not change the structure of teaching it means that all those classroom teachers now have degrees whereas once they didn’t. Elsewhere middling level jobs once staffed by non graduates now have graduates. Also it shoves the margins right up to the top of the Bell shaped curve which means many more at the margins. So what happens then? Add on to this a rapidly changing labour market where most of the graduates are either in non vocational subjects or in subjects where the labour market is limited (media and acting etc.) then there are going to be a lot of people with degrees flipping burgers or stuck in front of service computer screens.
I always have a problem with this claim of too many graduates or the wrong sort of graduates; I suspect something Neo-Liberal/New right about it.
Firstly is ‘education’ a quantifiable entity or finite resource; it’s not because education is learnt/culture & cannot be ‘taken away’ from any human.Moreover even if you accept there is current ‘over-supply’ of graduates which I personally do not accept – our society and our economy is better off in the long term with flexible/adaptable/intelligent beings often termed ‘human capital’ & who will also enjoy better more fulfilling lives. The New Right do not like it because it challenges their fixed elitism and they have a dislike of graduates doing all kinds of subjects which make people think more. But anyway the massive growth of unis since the early 1990s has seen many more people of all classes & both genders doing maths, science and technology. The UK does not generally(engineering is a problem) have a problem with the top 50% of its young people – it’s those at the bottom who need even more education and training and have been left behind.
I agree that there is a pension crisis looming but what is your suggested solution? The state will not be able to afford it on a ‘pay as you go’ system. The ration of workers to pensioners has fallen from 10:1 in 1945 to 4.4:1 today and is expected to fall to around 2.2:1 within the next 30 years. There just won’t be enough taxpayers to pay for pensions at anything other than a minimal level, if that.
People must be encouraged to save for their pensions, that is what tax relief encourages them to do.
You seem to imply that you don’t think tax relief on pension payments is a good idea. That would probably lead to fewer people saving for their own pensions landing the younger generation with even more to pay to the older generation. How would you pay for this?
Read the report
The problem for those of us currently ‘saving’ for our pensions is that most of those savings are just purchases of second hand pieces of paper that (we hope) will deliver capital growth or income streams. The trouble is that you or I buying a share today does nothing to enable the company that issued it to do anything to generate that growth or income stream. The equity market is too far removed from the initial aim of it funding investment.
It is, at least, a little different with corporate bonds. Debt financing is used for investment and there’s a direct link between the assets that we put in our pensions and the financing of investment.
I don’t share Richard’s view of the role of tax relief in pensions. Or, rather, on a personal level I’m in favour of the fact that I get some modest break from a tax system that makes it very hard for most of us to accumulate our own safety net* (but very easy for those born with one to retain it). However, I do share his bleak view of the wider industry, it’s impact, and it’s long-term outlook.
(* which I say with the absolute appreciation that those of us benefitting from said tax relief are, at least, in a far better position than those who are not. I don’t ask anyone to weep for my hardship.)
Once again we see the fallacy that saving for retiremnt actually creates the resources. It doesn’t. All you are doing is accumulating money which is a claim on a share of the resources at any given time. The saving doesn’t create additional resources when you want them – all it does is help to spead thema bit more thinly.
The other thing it does is enable the Suits in the City to live high on the hog off your pension scheme when the contributions are paid.
So it’s useless at the macro level. At the level of the individual pensioner, you damn well do want a share of the food and heating when you get old and if you don’t have anything in a pension scheme, you will be even worse off.
I’ve always believed this argument more political than based in reality. They are reporting an increase in the number of old people to young people, suggesting a population drop, then on the other hand, we hear of a plea for recruitment of more midwives as we are apparently in the middle of a baby boom!
In 16 years, or 2029, there will be a new generation of workers of working age to take the pension strain!
I believe that the argument that there are more old people and therefore they have to work up to 4 or 5 years longer to get a full state pension was always a phoney one!
This is without the fact that politicians have always raided the National Insurance Fund!
The more educated the workforce the more useful they are to potential employers. I despise the Right wing slant on this too.
Unfortunately the young graduates have been cast into debt slavery due to the thoroughly evil economic policies followed to ensure that they are completely compliant and choke off any possible rebellion.
Debt is equivalent to a virtual slave collar.