£10,000 for all 25 year olds: A redistribution of wealth: Who really benefits?

Giving millennials £10,000 to tackle the UK generation wealth gap has been proposed this week. The crude notion is to spread wealth quickly to younger people across the board.  Investing directly instead in social housing, in families and in education may turn out to be a better option that yields greater social and fiscal benefits in the long run. 

This week heralded the eagerly awaited final report of the ‘Intergenerational Commission’ that was a spin-out from the Resolution Foundation (RF) [1]. It was the culmination of a series of twenty two detailed reports released over two years of research.

The media headlines concentrated on a proposal to: “Tax on pensioners proposed to heal inter-generational divide” and “Give millennials £10,000 each to tackle generation gap, says think tank” [2]. The basic idea reported was that everyone should get a “citizen’s inheritance” of £10,000 at 25 at an overall cost of approximately £7 billion per year. This would be funded largely through higher taxation on the transfer of funds and inheritance from older people; effectively an intergenerational transfer of assets to redress an “imbalance”. However, the imbalance is probably not the fault of older people but rather of the current economic mess that is still evolving and made less certain by Brexit.

The Resolution Foundation report [1] is not a new idea as they are not the first organisation to propose this. Earlier in April the Institute of Public Policy Research (IPPR) launched a report from its ‘Commission on Economic Justice’ that reached a similar conclusion [3]. They called it a “universal minimum inheritance” to be handed over at 25. It also was an attempt to address growing wealth inequality in the UK. This is one of the worst in the developed world and is undoubtedly a serious concern. However, the underlying causes defy any superficial or easy resolution [4] (OECD and TEFS Social Mobility: It’s the economy, stupid. 9th May 2018). The fact that the inequality also spans the so called ‘inter-generational divide’ is difficult to ignore. The drift in the last ten years probably represents more a failure of government policies as much as anything else. The earlier policy paper by the IPPR (27 pages) and the latest by the RF (229 pages) are significant. The headlines trivialise what are very authoritative, detailed analyses and conclusions reached by many experts. The credential of both organisations and their contributors is not in doubt.

However, what should be addressed are the motives behind the recommendations.

Where is all of this coming from? The credentials behind the ‘think tanks’.

Both organisations have significant influence. The Resolution Foundation is led by ex- Government minister, David Willetts, who is respected for his intellect. His conservative origins suggest to some that he must lead a ‘right wing’ think tank. However, this would be misleading. The RF stresses independence in their work and this is reflected in their composition. For example, the current Director is Torsten Bell, a former senior advisor to Labour leader, Ed Miliband. It was founded as a charitable organisation in 2005 by Sir Clive Cowdery who donated substantial funds from his successful time in the insurance business. The aim was address challenges facing those on low to middle incomes and developing policy solutions. Before David Willetts, the foundation was led by Gavin Kelly (He joined the Foundation from No 10 Downing Street where he worked as Deputy Chief of Staff for Gordon Brown and the Labour Government) from 2010 to 2015. Before that by Sue Regan (she was previously adviser to David Blunkett and the Labour Government at the Department for Work and Pensions) from 2005 to 2010.

The Intergenerational Commission itself was specifically set up to look at inter-generational fairness in detail. Its composition is listed below the references in Appendix 1 and was supported by the work of a sixteen strong technical panel. This included Paul Gregg, Professor of Economic and Social Policy at Bath University who authored a paper stressing the important role of education in the determining the existing inter-generational income divide in the UK [5].

The launch of the report itself also reflected the somewhat eclectic philosophy of the organisation and is available on video [4]. The speakers were clearly important in the genesis of the radical proposals. It is interesting that Carolyn Fairbairn, Director-General of the CBI and Frances O’Grady, TUC General Secretary, spoke largely about the priorities of their respective organisations and not the citizen’s inheritance. It was left to Torsten Bell to announce the proposed citizen’s inheritance. One audience member questioned if the resolution foundation had ever influenced government. The answer was their living wage proposals of 2013 [7] adopted by a conservative government. However, this might be seen by many as in effect an extension of Labour’s earlier minimum wage policy.

The earlier policy paper on the ‘universal minimum inheritance’ arose from the work of the IPPR. This organisation has considerably more influence on government. Like the Resolution Foundation, its make-up and philosophy is eclectic despite being referred to as more ‘left wing’ in outlook. Founded in 1988, its first director was the late James Cornford [8]. His background as an academic and former director of the Nuffield Foundation provided the IPR with a clear policy steer. From 1998 to 2003, Matthew Taylor was its director before he went onto head the Number 10 Policy Unit for the then Labour government in 2005. The current director is Tom Kibasi, formally of McKinsey and Company that is a very large management consultancy. His main experience is in health care practice.

Fuelling the conflict between the generations.

Both of the above ‘think tanks’ appear to be more constructive in their outlook when compared to other groups. These seek to bring to the attention of younger people that a vast generation wealth gap is emerging and place the blame with the older generation. One example is the Intergenerational Foundation (IF) that takes a much more aggressive approach to the issue. In 2017 a report referred to the younger generation burdened by student loan debt as the “packhorse generation” [9]. Such emotive terms are sure to fuel growing discontent and misunderstandings amongst younger people in relation to our older citizens. Although similar sounding in name, the IF has a different pedigree. It was founded by former or current journalists on the Guardian, Ashley Seager, Ed Howker and Shiv Malik, and economist Angus Hanton. In 2010, Howker and Malik authored the provocative text called ‘Jilted Generation: How Britain has Bankrupted its Youth’ [10]. The older generation appear as the cause of the problem. However, this was not the beginning of the smouldering discontent.

Earlier David Willets authored a book called ‘The Pinch’ in 2010 [11]. Included was a chapter on “Spending the kids inheritance” that was a harbinger of the current report and surely determined his current philosophy. The rise over recent years of such publications is causing considerable resentment of older people. But placing the burden onto ordinary working people, that are reaching the end of their hard working lives, distracts everyone, young and old, from spotting the real problem. It seems that fixing the economic mismanagement of recent governments, low wages, profligate profiteering, exploitation by employers and a general economic downturn can be conveniently set aside in favour of blaming pensioners.

Who benefits from this radical redistribution of wealth?

The RF report is extensive and well researched. The detail regarding current fiscal outcomes is compelling and cannot be covered completely here. The main proposal is to impose a transfer of capital from the older generation to younger people in a phased plan. By 2030 all 25 year olds would get a windfall of £10,000 set aside in a trust account. This would rise to an annual cost of £13.5 billion in 2029 before stabilising to inject £7.0 billion per annum into the economy thereafter. The current and projected increase in the size of inheritances being transferred to the next generation is highlighted: “Fast-growing inheritances that are set to double in the coming two decades will help some beyond this age (45). But they are much less likely to benefit the almost half of 20-35-year-old non-home owners whose parents do not own either.”

The crude notion is to spread wealth quickly to younger people across the board. Current predicted inheritances are expanding fast but benefit only those that get them; many are exclude from this gain in wealth. This is fuelled mostly by high property values that are predicted to widen the inequality further. The proposed redistribution of wealth would quickly alter the balance of wealth inequality in the UK that has one of the largest gaps in the developed western economies [4].

Twentyfive year olds can expect the £10,000 as a “restricted-use asset endowment”. This means that the money is held in a provider bank account to be released for a limited number of purposes. These include; a deposit for a house (about 50% of current deposits), paying off student loans, starting a new business or part of a longer term pension investment. Certainly those without any assets would get a welcome kick start. Many would seek to purchase a home to build their investment for the future. Some of the worst off would seek to reduce their debt. However, others already with wealth would see this as a pension boost.

The problem of a housing shortage is also detailed. It is proposed that capital gains tax is abolished on the sale of housing assets to increase the return of properties onto the market. Increased funding for improved planning support for local authorities and the release banked land for housing is also proposed. This would seem to benefit the developers who would see things move faster. Thus, it might be expected that most 25 year olds will use the £10,000 as part of a deposit for a property mortgage. This might be predicted to yield a better long term yield as it did for the older generations wealthy enough to take part in the property market. However, it is also likely to further fuel house price inflation. The main beneficiaries would be the property developers gaining more profits. With plenty of warning of such a scheme coming into play, they would seek to buy up land, then avail themselves of the improved planning regime proposed. They would expect profits to soar and the government might just as well send the money directly to them to build affordable homes instead.

There is little evidence of a detailed cost-benefit analysis. However a positive cost-benefit  in comparison to other options is essential for such a large scheme to start. Once started it would be difficult to stop; as the student fees and loans scheme have demonstrated. It might be worth remembering that David Willets, when he was Higher Education minister, oversaw the increase in fees to £9,000; and hence soaring student debt. By 2013 he was selling the student loans to a private enterprise at an overall loss that reduced the public debt liability by only £160 million. As expected, private enterprises are enthusiastic if they can smell profit from such a deal.

To raise such large sums of money, that stabilises at £7billion per year in 2030, is no mean task. To fund the scheme, it was proposed to radically alter the tax regime related to inheritance and transfer of assets. The cut in capital gains tax on properties would tend to assist those of greater wealth and those seeking new homes when more become available and they consider using their £10,000 windfall. Inheritance tax would be abolished to be replaced by a “lifetime receipts tax”. There would be an allowance of £125,000 beyond which inheritances and gifts received would be taxed. This would be at 20% initially for the first £500,000 and at 30% for anything above this. Initially this is expected to gain £5 billion for the government would rise as the scheme progressed. The fiscal advantage of the tax is obvious. More money would be raised at the expense of those inheriting by gathering more of them into the tax net. At present, inheritance tax is only paid on sums above £325,000 but at a much higher 40% rate. The abolition of it and replacement with a more widely applied tax at a lower rate might benefit those that inherit larger sums.

A report in the Mail on Sunday in 2010 [11] revealed that 23 members of the 29 in the new coalition cabinet were millionaires. Taking the hypothetical case of a former minister, with at least £1.9 million of assets that two children will inherit, then each would currently pay approximately £230,000 in inheritance tax. However, under a “lifetime receipts tax”, they would each pay approximately £197,500 in tax. That is a saving of about £32,500. In the future, people in their position might also be in receipt of a further £10,000 that they would most likely have invested in property or a pension. The increased tax load would therefore be spread over a larger number of families that are currently spared inheritance tax. There is a crossover point above which those that inherit large pots of money gain more.

The political paradox.

The role of the TUC and unions in these proposals will not have escaped observers notice and this is somewhat puzzling at first sight. Whilst the idea of a redistribution of wealth might seem attractive, other aspects need more scrutiny. Frances O'Grady, the TUC General Secretary and Mary Senior, the Scotland Official of University and College Union, both contributed to the IPPR Commission on Economic Justice [3]. The redistribution of wealth, and a proposed increase corporation tax to inject up to £1.5 billion into education and training, certainly fits with union policies. However, the benefit may be illusory in the long term. The IPPR seeks a broader scope to raise funds for a much wider “Citizens Wealth Fund” that includes, the sale of government assets, including the Royal Bank of Scotland for £8.7 billion. The final outcome might be a hybrid of the two proposed schemes. However, questions have to be asked about how the increase in funding should be spent.

A one off payment to 25 year olds seems astounding when many less well off will be burdened by debt in any case. Surely it would be more prudent to redistribute that wealth onto those that need assistance during their education in earlier years. The returns from this  policy may prove to be better in the long run.

A reaction by a young potential recipient, Iman Armani in the Guardian introduces a healthy scepticism into the debate: Millennials like me need real solutions, not a £10,000 gimmick [12]. “£10,000 for every young person sounds like an expensive plan with no promise of fixing the real issues” succinctly sums up the sceptics case and lists the many more things that need to be done to improve the lot of young people.

It seems therefore ironic that also this week the TUC released a report revealing that the number of children in poverty from working households is rising from under 2.0 million in 2010 to over 3.1million this year. This is a direct result of government policies since then that have seen a widening in the distribution of wealth. The TUC call is that if: “This situation is to improve, working families need to earn enough to support their children. That means raising the minimum wage needs to £10 as soon as possible and ensuring the social security system is nimble enough to prevent families from falling into poverty in the first place”.

There are therefore likely to be many competing demands that might be placed upon any increase in revenue. In turn, the political dimension is likely to be a key factor. The proposal that sees taxes releasing capital to every 25 year old could be a step  too far. Instead a more prudent use of funds to be spread over support for families, their children, and particularly younger students in education, might be more palatable. Indeed it may be a better investment for the country in the long term.

The 'Green Book' test.

The last word will probably go to the Government’s own guidance. The so called ‘Green Book’ [14] applies to: “all proposals that concern public spending, taxation, changes to regulations, and changes to the use of existing public assets and resources”.

In valuing relevant costs and benefits it recommends that: “The costs or benefits of options should be valued and monetised where possible in order to provide a common metric. This is usually done by assessing the value which reflects the best alternative use a good or service could be put to – its opportunity cost”. The guidance also notes that: “Transfers benefit the recipient and are a cost to the donor and therefore do not make society as a whole better or worse off”.

Investing directly in social housing, in families and in education may turn out to be a better option and yield better returns in the long run.

Mike Larkin, retired from Queen's University Belfast after 37 years  teaching Microbiology, Biochemistry and Genetics. 

References

[1] A new generational contract: the final report of the Intergenerational Commission. 8 May 2018  https://www.resolutionfoundation.org/publications/a-new-generational-contract-the-final-report-of-the-intergenerational-commission/ and The new wealth of our nation: the case for a citizen’s inheritance by George Bangham. https://www.resolutionfoundation.org/publications/the-new-wealth-of-our-nation-the-case-for-a-citizens-inheritance-2/

[2] “Tax on pensioners proposed to heal inter-generational divide”. BBC News 8^th May 2018 http://www.bbc.co.uk/news/business-44029808 and “Give millennials £10,000 each to tackle generation gap, says think tank” The Guardian 8^th May 2018. https://www.theguardian.com/money/2018/may/08/give-millennials-10000-each-to-tackle-generation-gap-says-thinktank

[3] IPPR Commission on Economic Justice. Our Common Wealth A Citizens’ Wealth Fund for the UK. https://www.ippr.org/research/publications/our-common-wealth

[4] OECD UK Reports. Income inequality data update and policies impacting income distribution: United Kingdom (February 2015) http://www.oecd.org/unitedkingdom/OECD-Income-Inequality-UK.pdf.  OECD Library Archive https://www.oecd-ilibrary.org/ and TEFS Blog Social Mobility: It’s the economy, stupid. http://studentequality.tefs.info/2018/05/social-mobility-its-economy-stupid.html

[5] Greg et al 2013. Research Paper Series # CASP1. Understanding income mobility: The role of education for intergenerational income persistence in the US, UK and Sweden. http://www.bath.ac.uk/casp/Documents/working papers/casp1_understanding_income_mobility.pdf

[6] Resolution Foundation Repairing Britain’s generational divide: The Intergenerational Commission’s Final Report launch. Tuesday 8 May 2018 https://www.resolutionfoundation.org/events/repairing-britains-generational-divide-the-intergenerational-commissions-final-report-launch/

[7] Beyond the Bottom Line: The challenges and opportunities of a living wage. Resolution Foundation Report 20 January 2013. https://www.resolutionfoundation.org/publications/beyond-bottom-line-challenges-opportunities-living-wage/

[8] James Cornford obituary.  https://www.theguardian.com/politics/2011/oct/05/james-cornford-obituary

[9] The Intergenerational Foundation http://www.if.org.uk/   “Packhorse Generation: The long debt tail of student loans” 21 January 2017. http://www.if.org.uk/research-posts/packhorse-generation-the-long-debt-tail-of-student-loans/

[10] Ed Howker and Shiv Malik 2010. “Jilted Generation: How Britain has Bankrupted its Youth”. Icon Books. ISBN 9878-1-84831-198-5

[11] The coalition of millionaires: 23 of the 29 member of the new cabinet are worth more than £1m... and the Lib Dems are just as wealthy as the Tories. The Mail on Sunday 23 May 2010. http://www.dailymail.co.uk/news/election/article-1280554/The-coalition-millionaires-23-29-member-new-cabinet-worth-1m--Lib-Dems-just-wealthy-Tories.html#ixzz5F1XqG2l2

[12] Iman Amrani.  Millennials like me need real solutions, not a £10,000 gimmick. The Guardian 9^th May2018. https://www.theguardian.com/commentisfree/2018/may/09/millennials-10000-young-people-education-employment-property

[13] New TUC analysis reveals child poverty set to soar by 1 million in eight years. TUC. 7th May 2018. https://www.tuc.org.uk/blogs/new-tuc-analysis-reveals-child-poverty-set-soar-1-million-eight-years

[14] THE GREEN BOOK: CENTRAL GOVERNMENT GUIDANCE ON APPRAISAL AND EVALUATION. 2018.  https://www.gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-central-governent

Appendix 1.

The Resolution Foundation ‘Intergenerational Commission’

Chair: David Willetts.

Members: Vidhya Alakeson, Chief Executive of Power to Change; Kate Barker, Chairman of Trustees, British Coal Staff Superannuation Scheme; Torsten Bell, Director of the Resolution Foundation; Carolyn Fairbairn, Director General of the CBI; Geoffrey Filkin, Chairman of the Centre for Ageing Better; John Hills, Professor of Social Policy at the London School of Economics; Paul Johnson, Director of the Institute for Fiscal Studies; Sarah O’Connor, Investigations Correspondent and columnist at the Financial Times; Frances O’Grady, General Secretary of the TUC; Ben Page, Chief Executive of Ipsos MORI; Nigel Wilson, Group Chief Executive of Legal & General

Technical Panel: Chair: Matthew Whittaker, Deputy Director of the Resolution

Foundation; Kate Bell, Head of the Economic and Social Affairs Department at the TUC; Chris Curry, Director of the Pensions Policy Institute; Anna Dixon, Chief Executive of the Centre for Ageing Better; Bobby Duffy, Managing Director of the Ipsos MORI Social Research Institute; Frank Eich, Senior Advisor at the Bank of England; Laura Gardiner, Principal Researcher at the Resolution Foundation; Paul Gregg, Professor of Economic and Social Policy at Bath University; Andrew Hood, Senior Research Economist at the Institute for Fiscal Studies; David Kingman, Senior Researcher at the Intergenerational Foundation; Abigail McKnight, Associate Professorial Research Fellow, London School of Economics; Rain Newton-Smith, Director of Economics at the CBI; James Plunkett, Director of Policy & Advocacy at Citizens Advice; Jonathan Portes, Professor of Economics and Public Policy, King’s College London; James Sefton, Professor of Economics at Imperial College London; Anna Vignoles, Professor of Education at Cambridge University; Kate Webb, Head of Policy at Shelter; Duncan Weldon, Head of Research at Resolution Group