Britain | The elderly

Shades of grey

Pensioners’ incomes are now higher than those of working households. But some are doing much better than others

BRITAIN has a long and undistinguished history of treating its elderly badly. In the 1960s about 40% of pensioners were living in poverty, compared with less than 10% of working-age folk. In an influential study published in 1979 Peter Townsend, a sociologist, argued that pensioners were systematically ignored by politicians and the public, with “barbarous effects” on their standard of living.

These days, the elderly are living it up. In 2000-14 spending by the over-75s on dining in restaurants rose twice as fast as similar spending by the under-30s; on cinema and theatre tickets, it rose five times as fast. Over-65s currently account for less than one-fifth of overall consumer spending; this will rise to one-quarter within two decades, says Vicky Redwood of Capital Economics, a consultancy. Businesspeople smell opportunities. A complex billed as London’s first luxury retirement community will open in the spring, with a swimming pool and views over Battersea park from penthouses that are on the market for up to £3m ($4.3m).

At first glance it is difficult to see how Britain’s 12m pensioners can afford all this high living. The country’s replacement rate—what public pensions pay compared with pre-retirement earnings—is near the bottom of a 34-country ranking calculated by the OECD, a rich-country club. The basic state pension is just £116 a week, compared with the median full-time salary of £530. Relative to what those of working age earn, it was on a sharp downward trend in 1980-2009 (though it is now rising).

State pensions may look measly but oldies have other sources of income. In the past 30 years other welfare benefits, such as those related to housing and disability, have increased by 14% in real terms for the average retired household, against 7% for the non-retired. Private pensions have also done well, since for much of the 20th century stockmarket returns were high. For a retiree in the top income quintile, a private pension now pays out 2.5 times as much as one from the state, up from less than 1.5 times in the early 1980s. After accounting for private pensions, Britain sits at the OECD average for incomes in retirement.

Yet even this underestimates the prosperity of the elderly. When measuring incomes, economists often subtract the cost of rent or mortgage payments, to give a better idea of the person’s disposable resources. In a country where housing is particularly expensive—by one estimate only Monaco is pricier—owning a home amounts to a big implicit income boost. Over-65s own 60% of the houses in Britain whose mortgage has been paid off.

Into extra time

After subtracting housing costs, pensioners’ incomes surpassed those of the non-retired in 2011, finds the Institute for Fiscal Studies (IFS), a think-tank (see chart). Poverty among pensioners is now below that of working-age people without children (and far below those with them).

The rise of swanky retirement homes hints at another trend: that the wealthiest pensioners’ incomes are soaring away from those of others. The modern labour market favours workers with brains, not brawn. Across the world pay has risen for the highly educated, who continue to reap rich rewards into old age. Today’s educated elderly are more productive than their predecessors. The skills that complement computers, like creativity and management, do not necessarily decline with age.

This is particularly evident in Britain, which relies on the service sector more heavily than almost any other country. With plenty of jobs in finance, the media and the like, 27% of 65- to 69-year-olds with degrees are employed, compared with 14% of those in that age group with only secondary-school education or below. Indeed, retirees are now putting in longer hours than many youngsters: in Britain someone over the state-pension age but under 70 who has a degree is now more likely to be in the labour force than a 16- to 24-year-old with no qualifications.

With the growth of the post-retirement labour market, oldsters’ incomes have diverged. Between 1984 and 2014 the gap in disposable income between the richest and poorest retired households grew by one-third, a similar increase to that seen in working households. Pensioners in the top income quintile have seen their earnings from salaries and self-employment rise in real terms by 60% in the past 30 years. The strong performance of private pensions has topped up these earnings.

The brainy will continue to benefit. Businesses’ complaints about finding labour are growing, according to surveys by the Bank of England, especially when it comes to skilled workers. Demand for the educated—of whatever age—will keep rising. And so inequality will widen. The IFS forecasts that in 2010-22 the income gap between a pensioner in the 90th percentile and the median one will double.

Inequality between older pensioners and new retirees may also be rising. Ian Tonks of the University of Bath reckons that, with low equity returns in recent years (and, with the current market turmoil, no sign of that improving soon), people retiring today will have more meagre pensions than those who hung up their boots at the turn of the millennium. The number of private-sector “defined benefit” pension schemes—in which the worker receives a juicy payout based on his earnings—that are open to new members has fallen by 90% in the past two decades. Wages are still below their pre-crisis peak; as workers struggle to save, pension pots will not grow much.

Small wonder then that nearly half of working-age Britons doubt they will save enough money for a “comfortable” retirement; three-quarters believe they will be worse off than their parents. Today’s pensioners are living in a golden age, but the spending spree may not last for long.

This article appeared in the Britain section of the print edition under the headline "Shades of grey"

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