Will Osborne raid pensions on Budget Day to save the young?

As George Osborne presents his latest Budget to the nation the fuss will mostly focus on whether the Coalition remains loyal to its austerity programme in the face of weakening growth.

If it does then the Opposition is likely to pounce and accuse Osborne and co of sacrificing the UK’s standard of living to protect our triple A credit rating. But that is the boring response.

What I will be looking at far more closely is if Osborne uses the biggest weapon in his armoury and kick-starts what could degenerate into inter-generational warfare.

That weapon is pensions.  Tax relief on pensions is an attractive target for the government, right now you can save up to £50,000 a year. Although you pay income on earnings before any pension contribution, the pension provider can claim back tax at a rate of 20%, hence the “relief” is £20 for every £100 you add to your pension pot. Pensions have been “raided” before.

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Back in 2010 the government reduced the annual limit to this pension relief from £255,000 to £50,000. The government argued that this would only effect the uber-wealthy. However, you need to earn a fairly good wage to save £50,000 in your pension per year, thus if Osborne takes the populist track this time round we could see the £50,000 limit cut even more.

But rather than sock the rich, Osborne is actually putting the burden on the cohort of baby boomers close to retirement. Look at it this way, if you are in your mid-30’s trying to run a household maybe with a couple of kids in tow, the chances are that large-scale pension saving is the last thing on your mind.

However, if your brood have flown the nest and you are about to retire in the next couple of years then you are more than likely going to try and top up your pot as much as you can to make those dreams of round-the world trips finally come true.

But is this fair? There is a good argument that says yes.

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The baby boomers have enjoyed unmitigated global economic growth and bull markets in equities. Likewise, those who have owned houses for the bulk of their adult lives will also be sitting on an asset they could sell for many times what they paid for it. 

In sharp contrast the economic fate of young people, even graduates, is fairly bleak right now. Youth unemployment in the UK hit 22.5 per cent in February. This data should be giving the government the shivers.

As KPMG mentioned after the latest employment data was released, the rising tide of youth joblessness is one of the most concerning issues for the country’s fiscal future as the cost of supporting young people as they try to find work in a lacklustre jobs market could have a long-term adverse impact on the economy.

Although the level of unemployment among the over 50’s and the over 65’s is significantly higher than the average rate of 8.3 per cent, at 9.2 per cent and 17.2 per cent respectively, it is still lower than the rate for 16-24 year olds.

This is worrying for a couple of reasons, if it takes young people longer to get on the career ladder and start paying taxes then the burden to pay for the baby boomers in their golden years is going to have to be carried by a smaller number of people while the UK population continues to age. But more important is the damage it could do to our social fabric.

Young people without job prospects and little chance of getting on the housing ladder, especially in the South-East, may start to feel resentful against the older generation who they could argue had everything so easy.

Usually it’s the old who talk about how easy the young have it, but now we are in a situation where parents could end up having a better standard of living compared with their children. The social ramifications of this could be extremely damaging. In the past inheritance used to be a nice cushion to help younger generations on their way in the world. But since life expectancies are rising, inheritance piles are depleting at a fast rate.

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There is a good argument to support the government stepping in to try and make things fairer between the generations through reducing pension tax relief to fund jobs schemes for the young or a cut in young people’s national insurance contributions.

Of course some of the baby boom generation haven’t had it so easy and the global recession has caused a wave of redundancies and under-employment among older workers. However, getting the young into a secure working environment should take precedence if we want the economy to grow into the future.

Inter-generational tensions may well start to rise in the coming years. In the future we could see political factions on the side of the baby boomers clash with those on the side of the young. This could get ugly.

Osborne needs to try and get this difficult balancing act right and help protect the prospects of the young while selling any changes to pension relief to the baby boomers as a benefit to them in the long-term: without it the country won’t be able to afford all of those generous defined benefit programmes that are now closed to younger workers.

But moves like this come at a political cost. Older generations are more reliable voters than the young, they are also more politically aware, thus any attempt to limit their pension benefits could be disastrous at the polls for Osborne and Cameron.

But since the Coalition looks fairly stable and the chances are we won’t go back to the polls until 2015; this could be an opportune time to deliver a fiscally neutral budget by wealth re-distribution among the generations.