Which generation has benefited most from the modern welfare system?

Nothing sparks the Great British fury like a sense of injustice. Especially if it’s financial.

This week, the generational wealth bunfight was rekindled after research by think tank the Resolution Foundation revealed baby boomers have, on average, gained 20 per cent more in benefits and tax breaks than they put into the welfare system.

The report, for the foundation’s ongoing Intergenerational Commission – looks at what people put in and take out from the welfare state over their lifetime. By examining past, present and projected taxes and education, health and social security receipts, it estimates different generations’ overall net contributions.

The post-war generation’s net gain is, for the most part, based on the expectation that the costs of paying for health and pension benefits in retirement are largely paid for by generations that follow them.

“This pressure on welfare spending will grow sharply from the early 2020s onwards as Britain’s large baby boomer population hits retirement and begins to draw more heavily on the welfare state,” the report warns.

The prospects for later generations is uncertain, with big decisions to come about how we maintain our welfare state without creating significant generational unfairness, the foundation warns.

David Finch, chief analyst at the Resolution Foundation, said: “From starting school and seeing the deductions in your first pay cheque to collecting your pension, people’s experience of the welfare state goes through several phases during their lives, with the NHS with them throughout.”

While benefits and contributions change at different points, many assume that it all adds up in the end. In fact some generations have received much more from the welfare system than they’ve paid in – with the baby boomers being the big “welfare winners” to date.

Relative gain

But campaigners warn that the research risks digging in emotional divisions along generational lines and that fuelling perception that everyone over a certain age is wealthy could serve to further isolate those fighting poverty in old age.

Caroline Abrahams, charity director at Age UK, said: “Focusing just on differences by age provides an incomplete and potentially misleading picture of what’s going on for older people since, in fact, the differences in income and wealth within age groups are significantly greater than those between them.

“While some people in the generation coming up to retirement are well-off, there are many who aren’t. This is also a generation that is facing increasing state pension ages and tighter working age benefits. It is also very concerning that levels of pensioner poverty appear to be rising again after years of them falling, with around 1.9 million older people now struggling to make ends meet. So, while this research tells part of the story, it certainly doesn’t tell it all.”

In fact, the report itself highlights the comparable experience of the so-called silent generation.

The modern welfare state was created just as many of this age group – born between 1926 and 1945 – started paying tax. As a result they have become the biggest net contributors to the system, with the oldest cohort on course to receive just 5 per cent more than they have paid in over the course of their lives.

But there may be something else going on here too. Back in 2008, data from the European Union Statistics on Income and Living Conditions found that more than 14 per cent of those aged over 65 in UK were facing persistent poverty – with an income of less than 60 per cent of the national average for two out of the last three years.

Among 18-64 year olds, the proportion was just 5.5 per cent.

Today, or at least in 2015 (the latest figures available), poverty levels among the over 65s are down to just under 10 per cent. Among working age adults the figure is up to a little over 6 per cent.

So while the post financial crisis experience of each is very different, there is still a greater risk of being in poverty after the age of 64.

What the figures also show, however, is that for the population as a whole, as well as each age group individually, the number of those in persistent poverty is creeping up.

Paying for it

Projections from the Office for Budget Responsibility show that maintaining current levels of healthcare and pension provision would mean welfare spending as a share of GDP increasing by 7 per cent by 2066, with rising health costs being the biggest cost driver.

Funding this increase would be equivalent to increasing tax revenues today by a fifth, or by £160bn a year.

It would represent a massive increase to the UK’s tax take, which currently stands at 34 per cent of GDP, but one which would bring the UK closer in line with the EU average, and with states like the Netherlands and Germany.

With the number of pensioners set to rise faster than the working-age population, funding extra welfare spending solely through raising taxes on the next generation of working people, as politicians have tended to do through income and consumption taxes, “will not be politically viable indefinitely”, the foundation asserts.

Instead, it argues we will need to consider asking people of all ages to contribute, and taxing Britain’s record £12.8 trillion of wealth more if the welfare state we have become used to is to be maintained.

“Ensuring future generations enjoy the same access to education, health and social security brings with it big challenges,” notes Finch. “We’ll need to spend an ever greater share of our national income on the welfare state.

“Pressures will begin to mount in the coming years as our large baby boomer cohort retires and starts to consume rather than contribute to the welfare bill. Those costs need to be addressed without placing the contract between generations at risk.

“We therefore need to think creatively about how we fund our welfare state in the future, rather than simply returning to the well-trodden responses of raising taxes on working people, or cutting funding to schools, social security and the NHS.”