Pensions – keeping a roof over our heads

In this member post, Daniel Wilson Craw reflects on discussions at this week’s Future of Finance event on pensions with Shadow Pensions Minister Rachel Reeves MP.

Free tertiary education. A job for life. Affordable housing. Final salary pension. All a thing of the past. The children of the baby boomer generation are looking increasingly likely to be worse off than their parents.

The Young Fabians recently considered the implications of the last of these, and how individuals entering the world of work can be encouraged to start putting money aside in a pension scheme. There was a broad consensus that better financial education was needed and the demise of the Child Trust Fund – as a way to get citizens in the habit of saving from an early – was not. The pension industry’s marketing of itself to young people was found wanting, particularly as their selling points – the tax-free nature, the employer contributions – were not familiar to some of the young professionals in the session itself.

Rachel Reeves MP noted that formulation of pensions policy involved, quite rightly, the likes of the ABI, the financial services sector and employers, but seemed to have ignored the views of the very people who it was aimed at.

While the pensions industry could be given a kick up the arse, I get the feeling a significant barrier to take-up is the effect of the economic downturn. Since 2008 there have been three trends.

Firstly people, particularly the young, have a lot less job security and are less likely to want to put money away for a long period of time when they might need some in the bank in case things take a turn for the worse.

Secondly, with the cost of borrowing pushed down, there is no incentive to save as it is difficult to find an interest rate which will beat inflation.

Thirdly, the shortcomings of the financial markets as a generator of wealth have been exposed, so that the “value of investments may fall as well as rise” warning on financial products is even more ominous for an unseasoned investor.

Talking about pensions is not enough to address the generational divide. Even if we all signed up for a pension, retirement doesn’t sound like fun. With credit still crunched and house prices still out of the reach of thirtysomethings, there are going to be a lot of people who will not own a home outright by the time they retire.

Only one in twenty over-65s currently live in the private rented sector with three quarters in owner occupation and a fifth in social housing. In comparison, 36% of 25-34-year-olds rent in the private sector. Now of course many of them will buy eventually, but the rate of those still renting when they hit 65 (or whenever we’ll retire) is going to be a lot higher than 5% the way things are going. Apparently if I continue paying £1200 into my pension pot per year and assuming it earns an average of 7% growth a year, I will get around £5000 per year in retirement. This sum would barely cover rent this year, let alone after 40 years of inflation.

Housing will have to be made a lot more affordable if the pensioners of the mid 21^st century are going to keep a roof over their heads.

Dan Wilson Craw is a Young Fabian Future of Finance Network member.

Recessionary paradoxes

The global recession has highlighted two paradoxes at the heart of government policy (old and new) – I’ve been reminded of this by two articles I’ve read this week.

Firstly, why are we so concerned about retaining the parts of the financial services sector whose reckless practices resulted in one of the worst contractions in UK economic output in history?

On the one hand bankers are vilified for their part in the recession and the attendant increases in unemployment and reductions in tax revenues; on the other we are reticent to do much about them for fear of losing jobs and tax revenues.

Secondly, why are politicians of all colours at pains to ensure that interest rates remain low primarily to ensure that houses (by which, strictly speaking, they mean mortgage debt) remain affordable when overleveraging of households both contributed to and compounded the effects of the financial crisis?*

On the one hand we are concerned by over-indebtedness of households; on the other we want household debt to be affordable.

I suppose you could argue these are consistent positions to hold by appealing to practical issues of addressing the issues in the short term.

While parts of the financial services sector contributed to the global financial crisis, it is difficult for the UK to wean itself of them in the short term – how would you replace foregone tax revenues? If this isn’t possible, would it result in steeper and faster fiscal contraction? Would this make recessionary pressures worse?

As for household debt, it’s reasonable to have a short-term concern about the potential impact of rapid household de-leveraging: the potential for a vicious downward spiral of consumer expenditure. (See The Economist this week on the related issue of interest rates).

And yet. And yet.

Arguments about the forgone taxes bank relocations would cause seem overblown to me. A Reuters special report argues that it would be harder for banks to relocate than they would have you believe.

And I sense politicians – like most of the country – have an irrational love of home-ownership; affordable mortgages are at least as desirable as a means of allowing first-time buyers onto the housing market, or existing home-owners to trade up, as they are of reducing recessionary pressures.

If we prioritise short term imperatives over longer term considerations, then we are unlikely to find much reason to change at all.

Alex Baker is Secretary of the Young Fabians.

* A related issue is supply of new homes – other things equal, home ownership would be more affordable if the government built more houses. If that’s the policy goal, then you’ve got to ask why successive governments have shied away from building more homes.

Is Maurice Glasman more radical than the nation’s youth?

God knows if the House of Lords is ready for Dr Maurice Glasman. The newly-ennobled community organiser/academic/guru left the Fabian Conference on Saturday entertained by his brilliance and agitated by his bluntness in equal measure. None more so than the Young Fabians who had invited him to be part of the lunchtime panel discussion looking at the “Squeezed Youth”.

The clunkiness of the term mirrors the fact that 11 million-plus 15-30 year olds in the UK don’t fit into any neat political box. So whilst the left’s political narrative focuses on the vague, yet compelling idea of the “squeezed middle”, it is the ‘lost generation’ being squeezed the hardest and left with the long-term bill for the future.

Take youth unemployment. According to the Centre of Economic and Social Inclusion, long-term youth unemployment grew by 22,000 last month and now stands 4.5 per cent. That is more than the adult figure.

Yet the Future Jobs Fund has been cut with no substitute being proposed. In housing, too, the Government will cut housing benefit for single young people under 35 by an extra £215 million each year, entitling them to only shared accommodation – because young people are expected to live in shared accommodation.

The idea was simple: ask young people to what they they feel ‘squeezed’ about and let them use their own voice. Lo-fi video-editing aside, the voices in the video were honest and real:

YouTube Direkt

Jobs, housing, transport, workplace representation – the video responses show young people care deeply about more things than they get credit for. Young people like 19-year-old Richard Serunjogi are not interested in just being limited to talking about ‘youth issues’. On Saturday, his emphasis was that young people have a stake in all the decisions being taken to shape Britain’s future, since that future is the one young people will eventually be responsible for.

So the lunchtime session at the conference was billed as exploring how Labour can reconnect with the young people behind these voices.

That was until Dr Glasman turned up. The largest round of applause during the session followed Glasman’s appeal against the “dispiriting, meaningless, interminable atmosphere” that follows many Labour party meetings, like the one he was currently sitting in. He remarked that the panel discussion managed to invoke old memories of a young Maurice-the-academic attending a conference in the Soviet Union. Brutally this was exactly the kind of meeting that community organising tells you not to have.

The worst thing: Maurice has a point.

As Jessica Studdert, who wrote a chapter on Labour party reform in last year’s Young Fabian pamphlet ‘The New Generation’, acknowledged engagement in Labour was often “in spite of, not because of” the way many local Labour parties involve young people. Yet new MPs, like Rushanara Ali, already know the importance of a more open engagement with young people. She emphasised that Labour MPs and the party as a whole needs to change the way it tries to interact with young people.

So young people leaving that session were left pondering: how did we allow ourselves to become less radical than Maurice?

This post was originally posted at Leftfootforward.

Cutting Housing Benefit is a false economy

Earlier this month, the Young Fabian Work and Families Policy Development Group looked at the issue of housing, here PDG member Catriona Hatton finds that the arguments for and against cutting housing benefit all point towards the need for more housing.

In June George Osborne announced that a new housing benefit cap would be introduced in an attempt to slash the cost of housing benefit, which has risen sharply to £19.6 billion per year from approx £11 billion in 1997. The cap places an upper limit of £400 a week on a four bedroom house and £280 for a two bedroom property in rented private sector.

In favour of the cap, there is a strong argument that leaving housing benefit uncapped increases the housing benefit bill, since landlords effectively set the rate at which the benefit is paid. If Government willingly pays housing benefit at the price set by the market, landlords have incentives to set the rents as high as possible, since raising rents will not affect the tenant’s ability to live there. The result is tax payer’s money going to the benefit of private landlords in the buy-to-let market, an upward pressure on property prices for all, and an ever increasing housing benefit bill.

However the arguments against the cap, in my opinion, far outweigh the arguments for it. The impact of the cap will have devastating consequences for recipients, particularly in London and the South East where in many places it is simply not possible to find quality housing at the rate set by the cap. In addition any future increases in the cap would be linked to consumer price inflation rather than increases in rental prices, reducing the real value of the allowance.

Importantly the social mix of the London would be drastically changed, with thousands of families being forced out of inner London, causing greater disparity in wealth between different parts of London. Overcrowding will occur and new slum areas are likely to develop, resulting in the less well off being geographically cut off from the wealthy in society.

All evidence shows that separation in this way lowers life opportunities, for instance due to inferior access to education and employment opportunities and lack of connections. In addition there would be greater pressure on schools and social services in other areas as a result of a sudden influx and overcrowding.

It is argued that the cap will increase incentives to find work. However this is unfair on recipients who are not able to work such as pensioners, people with serious disabilities, and also on those recipients who are already in work but it is too low paid for them to cover their rent fully.

The root cause of the escalation in the housing benefit bill is the under supply of affordable housing and addressing this would be the most beneficial solution. The priority should be to create more affordable homes through the building of council housing, the expansion of housing association schemes, private investment through subsidies and through the expansion of shared ownership schemes. Only when the supply of affordable homes is increased will it be unnecessary for the tax payer to subsidise high private sector rent. Unfortunately the cap will only serve to worsen the problem as waiting lists for council housing and housing association homes lengthen, and ultimately it will push people into poverty.