The old get richer, and the young get poorer

Britain's growing army of pensioners is getting a better deal from the state than at any time in the past 15 years while the young bear the brunt of the recession.

Research published today by the Institute for Fiscal Studies (IFS) reveals that the wealth of the elderly has grown faster than that of any other age group, while the amount they pay in tax has progressively fallen.

A separate study, also released today, suggests that, over a range of indicators, the young have lost out compared with older generations since the financial crisis of 2008.

The two pieces of research call into question David Cameron's pledge in a speech yesterday not to means-test benefits for the elderly, while suggesting removing some entitlements for the young unemployed.

The IFS research, commissioned by the Nuffield Foundation, found that more than 40 per cent of pensioners are now in the top half of the income distribution bracket, compared with 25 per cent 20 years ago.

Pensioners' incomes have risen by 29.4 per cent over the past 12 years, while non-pensioners' incomes have risen by 26 per cent. At the same time, changes to the tax and benefits system mean pensioners are paying less to the state than people of working age.

The most recent benefit cuts and tax rises, which will soon come into force, will reduce pensioners' incomes by 1.8 per cent (or £316 per year) compared to 4.7 per cent on average (or £1,781 a year) for households with children.

A pensioner with a gross income of £50,000 now loses only 20 per cent of that in direct taxes, while a working-age person with the same income loses 29 per cent. This is due to cuts in the rate of income tax that pensioners pay along with rises in national insurance, which they don't.

Pensioners are also eligible for a series of non-means-tested benefits, such as free TV licences, winter fuel allowances and free transport. The Government has also restored the link between pensions and earnings, with a new guarantee that pensions will rise by whatever is highest: earnings; inflation; or 2.5 per cent.

Benefits for the elderly account for £110bn of the total welfare bill – more than half the £207bn total. The growing gulf between pensioners and the working population has led some in Government to question whether pensioners are getting an unfair deal.

Both Nick Clegg and Iain Duncan Smith have privately questioned whether some benefits for the elderly should be means tested. But yesterday Mr Cameron explicitly ruled out any change of policy, saying he wanted to do the "right thing by those who have done the right thing all their lives". He said: "I want to be very clear: two years ago I made a promise to the elderly of this country and I am keeping it. I was elected on a mandate to protect those benefits."

Conservative strategists are aware that the elderly will be a key electoral battleground at the next election and Mr Cameron is understood to be concerned that he will be punished by voters if he is seen to be reneging on a promise made in opposition.

But Paul Johnson, director of the IFS think-tank and a co-author of the report, said it was clear that younger people had suffered the most during the recession. "What our research shows is that pensioners have done relatively better than working-age people over the last 13 years," he said.

"But other work done by the Institute has shown that in terms of employment, income and consumption it is the under-30s who have really borne the brunt of the recession."

Angus Hanton, co-founder of Intergenerational Foundation, said the research "puts into stark relief the real plight of younger generations".

However, Michelle Mitchell, charity director of Age UK, said any calculations on the relative wealth of pensioners could be misleading.

"We must remember that the number of pensioners in poverty remains at 1.8 million," she said.