Intergenerational

Fairness Index

Measuring Changes in Intergenerational Fairness in the United Kingdom

Authors:

Jeremy Leach & Angus Hanton

Foreword:

Professor Laurence J. Kotlikoff

26 June 2012

The Intergenerational Foundation () charity no: 1142230

Contents

Foreword by Professor Laurence J. Kotlikoff / 3
Executive Summary / 4
1. Background / 6
2. The Inaugural IF Index / 9
3. Understanding Changes in the Index: 1990–2011 / 11
4. The Component Measures / 12
5. How the Index is Created using these Component Measures / 28

We would like to thank the following people who have helped in the construction of the Index (but are in no way responsible for any errors which may exist):

Tim Lund

Tom Ward

Tom Emery

Harry Segal

Gary Frost

Antony Mason

Liz Emerson

Shiv Malik

David Parker

Andrew McGettigan

© copyright The Intergenerational Foundation

Foreword

Intergenerational inequity is the moral issue of our day.The developed economies have spent the post war era taking vast sums from young and future generations and handing them to the elderly.This redistribution has been a catastrophic success – greatly benefiting successive older generations, including the super rich elderly, but leaving enormous fiscal obligations to today's and tomorrow's children, including super poor children.

The unfunded obligations arising from this "take as you go policy" have been kept off the books in accounting practices that would make Enron blush. This systematic Ponzi scheme has now brought the participating countries to the point of fiscal insolvency. It has also fuelled a major rise in national consumption rates at the price of less national saving, domestic investment, and real wage growth.

The developed economies have not only engaged in fiscal child abuse and left their children with severely damaged economies, they have also practised educational, health, and environmental child abuse.In combination, these policies are putting an end to every parent's most fervent dream -leaving his/her children better off – with better health and education, a cleaner and safer environment, a higher earnings capacity, and a lower tax burden.

As the Intergenerational Foundation's vitally important Intergenerational Index makes vividly clear, the UK is failing miserably on each of these counts.The Index can be viewed as an Adults' Report Card, and it shows a failing grade.

I applaud the Foundation for providing this critical measure of how we are treating our children. Now it's up to us adults to take the actions needed to reverse the deterioration witnessed by index and to understand that our earthy futures reside in one place only – our children.

Laurence J. Kotlikoff

Professor of Economics, Boston University

Co-author of The Clash of Generations (The MIT Press, 2012)

Executive Summary

Today's decisions affectyounger and future generations.This index is the first attempt systematically tomeasurethe impactthatgovernmental policies haveon our children on a year-to-year basis.

What the Index Shows

  • The IF indexof intergenerational unfairness has deterioratedsharply over the last decade.Starting at a level of 100 in the year 2000 the index has risen to a level of 128, based onthe latest available data, indicating a much greater burdennow being placed on younger people.
  • The rise has been most pronounced since the financial crisis of 2008 – since thenthe index has worsened by6–7 points each year, whereas previouslythe worsening averaged about 2 points each year.

Chart 1. IF Index – 2000 to 2010 (base level of 100 in the year 2000)

  • Overallbetween 1990 and 2010 our index shows thatunfairness has steadily increased with the index risingfrom 84to 128.
  • The IF indexhighlights thatwhilst government borrowingand pension debt have increased steadily, there has also been an increased shift in favour of the older generation throughhigher charges for education, rising youth unemployment and high housing costs.

Why This Matters

  • The rising level of intergenerational unfairness should matter to everyone.The usual focus on simple measures of inequality between rich and poormisses the important inequalities betweengenerations.What this index highlights is the increasingproblem of poorer young people financing richer older people.
  • A rising index suggests that younger generations will be less inclined to support a status which puts the interest of older generations ahead of their own. They are likely to become disillusioned, and indeed one of our measures tracks the "democratic deficit" in terms of ageing councillors and fallingnumbers of young people voting.
  • The rising index is putting the social contract between the generations at risk.

How We've Constructed theIF Index

  • We've taken nine indicators that most affect our lives – including housing, government debt, the pensions burden, the environment – and put them together to create a measure of howthings have changed over recent years.Not all theindicators have got worse – some, such as UK carbon emissions, have been improving.
  • All the data series go back to 1990 and together they measurehow things have changed over the last 20 years.We have been careful to exclude the effects of inflation by using a GDP deflator and we have excluded the effect of population growth by looking at the numbers on a per head basis.All figures are taken from official sources and this report gives the reasoning behind the choice of indicators and the methodology used, andwe include the precise sources of the data.
  • We plan to publish annual figures for the index and each year we willtrackhow things get better or worse for younger generations.
  • These measures also provide a basis on which intergenerational fairness could be measured across different countries.

SECTION 1. Background

  • The Intergenerational Fairness Index which has been created by the Intergenerational Foundation (if.org.uk) is an expression of how fairness across the generations is changing over time.
  • It works by using quantitative data (that is openly available to all) that cover some of the most important aspects of our society (eg housing, employment etc).
  • We have attempted to make use of data series which go as far back in time as possible so that we can build up an historic picture of how these component measures are evolving. Each of the component data series that we have used can be expected to be updated on an annual basis so that we can continue to track them into the future. We have also attempted to make use of data series that can be compared between countries. In the future, therefore, we plan to make objective comparisons between the UK and other countries.
  • The Index is meant to be as open to scrutiny (and improvement!) as possible. All of the data that we have used are outlined in detail below and we also explain fully how the Index has been created from the component data. We are completely open to:

-Using higher quality data sources if these are available.

-Including other areas in the Index.

-Rectifying any errors that we have made.

  • Our initial Index is made up of data from the following 9content areas:

-Unemployment

-Housing

-Pensions

-Government Debt

-Participation in Democracy

-Health

-Income

-Environmental Impact

-Education

  • The Index makes use of 2 different types of component data:

-Data which indicate the degree to which younger people in our society are at an advantage or disadvantage compared to the societal average.

-The degree to which future generations (those who are not yet born) will be impacted by the ways in which we live our lives today or by government actions (ie how much they may be advantaged or disadvantaged by the actions of those alive today).

  • An increase in the Index indicates a worsening position for younger people in our society
  • The table below outlines which type of data is being used for each of the content areas.

Content Area / Younger Persons Comparison / Future Generations
1. Unemployment / Unemployment amongst younger people compared to UK average.
2. Housing. Measure A – Affordability / House price affordability compared to income levels of young people.
2. Housing. Measure B – Costs / Housing costs as a % of disposable income.
2. Housing. Measure C – Housebuilding / Numbers of houses built as a proportion of number of households.
3. Pensions. Measure A – State Pension / Cost of state pension payments per person in the UK workforce.
3. Pensions. Measure B – Unfunded Public Sector Pensions / Cost of unfunded public sector occupational pensions per person in the UK workforce.
4. Government Debt / Public sector debt per person in the UK workforce.
5. Participation in Democracy. Measure A – Age of Councillors / Average age of Councillors in England & Wales.
5. Participation in Democracy. Measure B – Voting / Participation in voting in General Elections by younger people.
6. Health / Under 60s usage of selected health services.
7. Income / Comparison of the income levels of young people to the UK average.
8. Environmental Impact. Measure A
– UK GHG Emissions / UK Greenhouse Gas emissions.
8. Environmental Impact.. Measure B
– CO2 Levels / Levels of CO2 in the atmosphere.
9. Education. Measure A – Levels of Spend / Spend on Education as a proportion of GDP.
9. Education. Measure B – Tuition Fees / Average tuition fee liability of students in Higher Education.
9. Education. Measure C – GCSE Pass Rate / % of School Leavers of Any Age Achieving 5 or more A*–C Equivalent Pass Grades.
  • We have attempted to ensure that there is no element of double counting. This is particularly problematic in relation to government debt where there is a danger that the costs of large elements overlap, such as the State Pension and Unfunded Public Sector Occupation Pensions, which are already included in our Pensions measure. As far as is possible, therefore, the costs of these two elements are omitted from the calculations of government debt.
  • It has not been possible to define the young in the same way across the sets of data which are available but we do not believe that the differences would materially affect our results. The age groupings that have been used do not allow direct comparison across the data sets. For that reason, we made the decisions about the definition of the young based on what appears most appropriate with the data that are available for that component measure.
  • Some potential obvious component measures have been omitted where we have not been able to identify a suitable data source for that measure. For example we have not successfully located a measure for the proportion of the population over time which holds a degree. Also component measures have been omitted where other factors are so dominant that they skew the picture for that measure. A good example of this is attempting to locate a measure for inherited wealth where the data are skewed so heavily by the increase in value of housing over the past 20 years, an element which has already been addressed through the housing measures. We remain very open to inclusion of other data sources if appropriate measures are proposed.
  • On the following pages we will look at how the data for each of the 9 component content areas have been gathered and included in the Index.
  • Finally we end by describing the process by which the different data sources have then been combined into the Intergenerational Index.

SECTION 2. The Inaugural IF Index

•The IF Index sets its base at 100 in the year 2000. We have taken the Index back to 1990 in order to provide historical context for its movements. Most of the component measures that we have employed have data that go back to 1990. Data for some measures, however, do go back far further and we have included all of the data that we have when we examine the component measures in Section 4 below. The table below indicates how the different sets of data have been introduced.

Year / Component Measures
From 1990 / Unemployment, Pensions (Measure A – State Pension Costs), Government Debt, Democracy (Measure B –Participation in Voting), Environmental Impact (both Measures), Education (Measure A – Levels of Spend; Measure C – GCSE Pass Rate), Housing (Measure C –Housebuilding).
From 1991 / Pensions (Measure B – Unfunded Public Sector Occupational Pensions).
From 1995 / Housing (Measure B – Costs).
From 1997 / Democracy (Measure A – Average Age of Councillors).
From 1999 / Housing, Health, Income, Education (Measure B – HE Tuition Fees).

•The Index is structured such that if the Index figure rises, it demonstrates that intergenerational fairness is declining and if it falls it shows that there is increasing parity between the lot of younger generations and society more generally. In all of the component measures with the exception of Education (Component A – Levels of Spend), an increase in the level of the component measure represents a decline in intergenerational fairness. In creating the index value for Education (Component A – Levels of Spend), therefore, an adjustment has been made to ensure that the rise in this component measure reduces rather than increases intergenerational unfairness.

•Three of the component measures, Pensions (Component B – Unfunded Public Sector Occupational Pensions), Education (Component B – HE Tuition Fees) and Government Debt, make use of source data that have not taken inflation or changes to GDP into account; as a result, the source data have been adjusted by the latest GDP deflator data (

•The initial IF Index results are as follows:

Year / Index / Year on Year Change
1990 / 84
1991 / 85 / 1
1992 / 88 / 3
1993 / 91 / 3
1994 / 93 / 2
1995 / 96 / 3
1996 / 98 / 2
1997 / 99 / 1
1998 / 101 / 2
1999 / 99 / (2)
2000 / 100 / 1
2001 / 101 / 1
2002 / 103 / 2
2003 / 106 / 3
2004 / 108 / 2
2005 / 111 / 3
2006 / 113 / 2
2007 / 116 / 3
2008 / 115 / 1
2009 / 121 / 6
2010 / 128 / 7

Chart 2. IF Index – 1990 to 2010 with a base level of 100 in the year 2000

SECTION 3. Understanding Changes in the Index: 1990–2011

So what are the significant factors that have caused the IF Index to move from a level of 84 in 1990 to its current figure of 128?

A. 1990 to 1995 – IF Index rose from 84 to 96.

  • The increase in the index in this initial period is principally driven by sharp rises in the value of unfunded liabilities for public sector occupational pensions as well as increases in the value of government debt. At the same time levels of unemployment amongst younger people continued to increase in comparison to the national average and there was a small but steady increase in the costs of the liabilities for the state pension amongst working people.
  • Offsetting these increases were the benefits of rising spending on education as a percentage of GDP and a steady decline in the UK's emissions of greenhouse gases.

B. 1995 to 2000 – IF Index rose from 96 to 100.

  • This was a period of the smallest rise in the Index with very little growth between 1996 and 2001. Although the value of unfunded liabilities for public sector occupational pensions continued to rise along with the gap between levels of unemployment for young people and the national average, their effects were balanced by a decline in overall levels of government debt a continued rise in spending on education.

C. 2000 to 2005 – IF Index rose from 100 to 111.

  • Four principal factors lie behind the increase in the index that occurred in the early years of the new century. The most significant were the increases which occurred in the value of government debt and unfunded liabilities for public sector occupational pensions. Youth unemployment also rose.
  • The introduction of the measure to assess housing affordability amongst younger people also contributed significantly to the overall rise in the index as median house prices doubled in value compared to median income levels amongst younger people over this five-year period.

D. 2005 to 2011 – IF Index rose from 111 to 128.

  • Some factors have improved intergenerational fairness in the past five years. These include a modest decline in house prices (mostly outside the southeast of England), continuing increase in levels of spend on education and a continuing gradual fall in the level of UK greenhouse gas emissions.
  • These, however, have been outweighed by significant increases in other areas. Most striking are the sharp rises in the value of government debt and the costs of unfunded liabilities for public sector occupational pensions. In addition, increases in levels of tuition fees for students in Higher Education have also contributed to the Index’s sharp rise in 2009 and 2010.

SECTION 4. The Component Measures

1. Unemployment

Purpose of Measure / To assess levels of unemployment amongst younger people compared to the UK average.
Measurement / The ratio compares the proportion aged under 25 who are unemployed to the average level of unemployment in the UK.
Data Sources / Eurostat: (comparing UK unemployment rate (%), annual average, for those aged under 25 to total unemployment rate).
Length of data / 1983 onwards

Chart 3. Proportion (%) of those aged under 25 (red line) who are unemployed compared to total UK unemployment (blue line) – 1983 onwards

Resulting Ratio of Youth unemployment – proportion of those aged 25 who are unemployed divided by the average UK level of unemployment

1983 / 1.83 / 1997 / 2.01
1984 / 1.72 / 1998 / 2.15
1985 / 1.61 / 1999 / 2.15
1986 / 1.59 / 2000 / 2.26
1987 / 1.48 / 2001 / 2.34
1988 / 1.44 / 2002 / 2.35
1989 / 1.41 / 2003 / 2.44
1990 / 1.51 / 2004 / 2.57
1991 / 1.62 / 2005 / 2.67
1992 / 1.66 / 2006 / 2.59
1993 / 1.72 / 2007 / 2.70
1994 / 1.76 / 2008 / 2.68
1995 / 1.80 / 2009 / 2.51
1996 / 1.89 / 2010 / 2.51

2. Housing. Measure A – Affordability

Purpose of Measure / To assess levels of affordability of UK housing amongst younger people.
Measurement / The ratio compares the median levels of income amongst those aged 20 to 29 (22 to 29 from 2008 onwards) to median house price values in England and Wales.
Data Sources / 1. House Prices: Land Registry

documents/housing/xls/141395.xls
2. Income Data:
income_distribution/menu-by-year.htm
Length of data / 1. House Prices: 1996 onwards
2. Income Data: 1999–2000 onwards

Chart 4. Median Income of those aged 20 to 29 (£000s) (red line) compared to median house prices (£000s) (blue line)

Resulting Ratio of House Price Affordability – Ratio of median house prices to median income levels of those aged 20 to 29

Year / Ratio / Year / Ratio
1999 / 5.75 / 2005 / 10.36
2000 / 6.05 / 2006 / 10.69
2001 / 6.37 / 2007 / 10.90
2002 / 7.70 / 2008 / 9.12
2003 / 9.07 / 2009 / 8.78
2004 / 10.23 / 2010 / 9.75

2. Housing. Measure B – Housing Costs

Purpose of Measure / To assess the proportion of disposable income which is spent on housing costs.
Measurement / The ratio expresses housing costs as a proportion of disposable income.
Data Sources / 1. ONS Family Expenditure Survey.

Length of data / 1995 onwards

Chart 5. Housing Costs as a Proportion of Disposable Income, 1995 to 2010

Housing Cost & Disposable Income, 1995 to 2010