Nov 162012
 

The scope of intergenerational fairness and justice is massive. It includes topics such as national debt and the environment and consumption of non-renewable resources. All of these are very important.

This article only discusses part of the topic: the transfer of resources (time, money, etc) between generations. Even that is a much bigger topic than can be covered here! This article is intended to set the context for further articles to come, rather than cover any aspect of the topic exhaustively. It simply provides a brief summary of some of the key aspects of the topic.


Background to this article

The trigger comes from the Intergenerational Foundation, which near the top of its home page says:

“We believe that each generation should pay its own way, which is not happening at present. British policy-makers have given undue advantages to the older generation at the expense of younger and future generations.”

What does “each generation should pay its own way” actually mean? Superficially this sounds a fair and just principle. But it doesn’t take much analysis to see that it is meaningless without further explanation! Somewhere behind that statement there is probably a credible principle struggling to make itself known. In the absence of clarity from the Intergenerational Foundation I’ll try to deduce what they should have said.

Here is what no one should be saying:

Naive view of “each generation should pay its own way”

No rational person can expect that in any year, or at any single stage in its life, a generation pays to society the same amount that it takes from society. The next two sections (discussing children and pensioners respectively) illustrate why societies can never work like that. Generations are inherently inter-dependent. (“No generation is an island, entire of itself”! Apologies to John Donne).


Intergenerational implications of children

Every generation starts off incapable even of surviving without resource transfers from the next-older generation (their parents and others) and often the next-next-older generation (their grandparents and others). We can discuss whether it takes a village to raise a child, or simply takes a family, but it certainly takes an older generation to raise a child. And countries with well-established welfare systems (including the UK) don’t leave it just to the family. They draw on financial resources from the wider public to assist the parents.

Some of the resource transfers to children

Such transfers long preceded the benefits system and schools, and indeed preceded money. (There is a controversial “grandmother hypothesis” that the menopause arose so that women would switch from “child bearing” to “child caring” roles. Whether or not that is how it arose, there is no doubt that grandparents often contribute resources to their grandchildren).

A feature of this case is that having children is optional. Some of the people whose resources are being transferred to younger generations did not have children of their own, and so didn’t previously incur an intergenerational obligation.


Intergenerational implications of pensioners

Pensions are always a hot topic where intergenerational conflicts are debated. Simplistically, young people work and pay into state funds, while old people don’t work and draw from state funds!

From Wikipedia:

“An inter-generational contract is a dependency between different generations based on the assumption that future generations, in honoring the contract, will provide a service to a generation that has previously done the same service to an older generation. The most common use of the term is in statutory pension insurance provisions and refers to the consensus to provide pension for the retired generations through payments made by the working generations. The use of the word contract is not entirely accurate as the next generation implicitly enters the agreement without consent.”

Using an arbitrary sequence of generation numbers, here (very simply) is what that quote means:

The intergenerational contract for pensions

The young working generation may feel that it is unfair that they pay for the pensions of people who will never return the favour. The old retired generation feel that they are entitled to receive pensions because they have previous paid for the pensions of people who didn’t return the favour. (And the young generation will eventually become an old generation and want to continue the cycle!)


Judging responsibilities and entitlements over a lifetime

Here is a more plausible view of “each generation should pay its own way”. A generation can’t be expected to exactly pay its way in the short term, (it may pay too much or too little), but it is plausible to expect it to pay its way over its lifetime. This generation contributes or receives resources, but it shouldn’t matter, for purposes of judging this generation, which generations receive or contribute those resources.

A generation paying its way over its lifetime

Rather than simple money, I’ve called this “social credit”. For example, the entitlement to a state pension isn’t that a person has paid a certain amount of money. It is that they have contributed for enough years. A lower earner will pay a little, while a high earner will pay a lot. The low earner will get a better return for the money paid than the high earner – it is a redistributive system (from better off to worse off) as well. And “social credit” may include resources other than money.

Some people in the generation, for example the disabled, cannot be expected to end their life with a zero or positive social credit. So the rest of us must expect to end our lives with a positive social credit. Here is the individual, rather than the generational, view of a lifetime:

Individual paying his/her way and more over a lifetime

Unfortunately, the whole cycle may take 80 to 100 years! That is a long time to wait to see if someone has paid their way, and if they haven’t it is too late to correct things!

So government has to set rules that it thinks will have the right effect, and individuals then have to obey the rules. If individuals obey the rules, but the effect is wrong, the individuals are not to blame. An obvious example is that the state pension age may be wrong, or the number of years needed to build up an entitlement to a state pension is inadequate, or average lengths of life are greater than expected.

Difficult decisions will have to be made, and people (young or old or both) will suffer, but “blame” is unwarranted and unhelpful. (Except for blaming the government if it was capable of getting it right but didn’t!) If individuals who obeyed the rules don’t later receive what they were led to expect, because of those government errors, those individuals are victims. It is too late to re-live their lives according to different rules.

If society as a whole wants different results in future, governments must set different rules now.


Life stages

It is tempting to lay out a person’s life from birth to death:

Simplistic life stages over a lifetime

The problem with this is that it implies responsibilities during childhood. When it comes to resource transfers, it is better not to treat children separately, but to treat them as their parents’ responsibility:

Life stages of capable adults

So it is parents whose “social credit” is depleted when they draw on others during their children’s pre-autonomy stage, (probably up to 18). Children themselves begin their autonomous life with a zero, not negative, “social credit”. (After all, the parents chose to have children but the children didn’t choose to exist).

Now the intergenerational resource transfers can be added to these life stages. In effect, the following diagram superimposes the lifetimes of everyone, so the arrows show (for example) that when one generation is at the “have children” stage and receiving resources, the same and other generations at the “working” stage are contributing those resources.

Simple view of intergenerational resource transfers

An important life stage is “Die”! It typically triggers resource transfers from old to young. In fact, some intergenerational problems are not that resources are tied up forever, (you can’t take it with you!), but that, as far as young people are concerned, old people don’t transfer them soon enough because they are not dying soon enough.


Resource transfer systems

Although a lot of attention is paid to the state’s formal transfer methods, including tax and benefits, there are also informal transfer methods that long preceded the state’s formal system:

Intergenerational resource transfer systems

Both systems do much more than intergenerational transfers, but that is an element of both of them. Neither is adequate on its own; if either ceased, there would be massive strains on the other. Both have to be taken into account in debates; any discussion about one of them is likely to be extended or countered by advocates of the other. Both systems will be part of any solutions.

Arguably, neither is adequately designed for the 21st Century, and they don’t work together in perfect harmony! In fact, there is probably inadequate knowledge of how they fit together, partly because there appears to be little detailed documentation of the intergenerational transfers of the informal system. How big are the informal transfers both from young to old and from old to young within families (etc)?

How do these transfers interact with pension amounts? The cost of child-care is a known problem; how much of a role can/do older people in a family play? The cost of long-term care for the elderly is also a known problem; how much of a role can/do younger people in a family play? What are the implications for the incomes of older people if they have to pay for their own long term care? What does this do to inheritance by younger people?


Conclusion

At the very least, discussions of intergenerational resource transfers must consider these life stages:

  • Optional education
  • Working
  • Having children
  • Claiming a pension
  • Dying

The transfer systems include:

  • The formal (government tax and benefits) system
  • The informal (family and charity) system

Typically, “blame” is unwarranted and unhelpful, especially if people have done what was expected of them at the time.


Further reading

External
Here

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