Spending Review: George Osborne’s pensions conundrum

The government - correction, any future government - is facing an increasing conundrum over what to do about pensions. Despite the hoo ha over today's Spending Review, the announcements the chancellor will make today will only apply to a small proportion of total spending.

The government – correction, any future government – is facing an increasing conundrum over what to do about pensions.

Despite the hoo ha over today’s Spending Review, the announcements the chancellor will make today will only apply to a small proportion of total spending. Only half of government spending is covered by Whitehall departments. The rest is annually managed expenditure, which is largely made up of state pensions.

In 2009/10, state pensions cost the Exchequer £66.8 billion. This is almost 10 per cent of all government spending. In 2007/08 the equivalent figure was £57.6 bn.

The rise in the number of those eligible for the state pension means the figure is set to rise faster in the coming years. The Triple Lock pension guarantee also means the state pension will very often rise faster than average earnings (as it is currently).

As the cost of looking after pensioners booms, the costs attached to being young and trying to make your way in the world are spiralling.

It takes young first-time buyers saving half their annual income more than 10 years to put together a deposit for a first home, and in London that figure rises to 24 years.

For those who own a house, however, property prices have quadrupled since the early nineties.

Young people are also much more likely than adults to be unemployed than other generations. In the last quarter of 2012, one in four young workers with five good GCSEs and 40 per cent of those with no qualifications were unemployed. Those who decide to go to university can expect to be saddled with debts that, in some instances, they may not pay off until they are in their 50s.

For those just entering the workplace, the minimum wage has already fallen behind inflation and some in the coalition have even called for it to be abolished altogether.

While it’s politically unpalatable to consider withdrawing benefits from the generation of pensioners who built the welfare state, in the next 10 years the so-called ‘Baby Boomer’ generation will reach pension age – a generation that has enjoyed free education, free healthcare, and who very often own their own homes.

So in effect, those who enjoyed the best of the post-war settlement are likely to be the last generation to enjoy the generous pension settlement.

At some point, however, whether we like it or not, this government or a future one is going to have to look at radical change to bring down the pensions bill.

Pensioners

However, without making people work considerably longer (which will bring its own problems), it’s going to be an incredibly politically risky issue to take on.

Not only are older people more likely to vote than any other group, but the wider public believes pensioners are the group most entitled to help from the government. According to a new IPPR/YouGov poll, pensioners come top when the public were asked which types of people they believed were most deserving of financial help from the welfare system.

In the same survey, a ‘young person leaving school but unable to find a job’ was considered most deserving of help by only 9 per cent.

The irony in the IPPR survey is found elsewhere, however. When asked who they believed was responsible for the rising cost of welfare in the past two years, ‘immigrants coming to Britain and claiming benefits’ came top.

As we’ve written before, migrants are overall net contributors to the economy (by quite a margin) and in the years to come it will be migrants who are, in effect, helping to pay for British pensioners.

According to today’s IPPR/YouGov survey, however, those receiving most from the system (pensioners) are the ones seen as the most entitled to more, and those making the largest net contribution (migrants) are perceived as the biggest drain on the welfare system.

Now perhaps you get an idea of just how politically hard it will be to get welfare spending down.

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