The Old Get Richer, the Young Get Poorer

The gap is growing in Europe because government policies favor retirees over young people.

Still voting.

Photographer: Paul Thomas/Bloomberg

Forget the Marxist adage about the rich getting richer and the poor getting poorer. The emerging divide is an age-related one: The old are getting richer and the young are getting poorer. 

A recent study by Carol Graham and Julia Ruiz Pozuelo showed that in developed nations, the U-curve of lifetime happiness bottoms out earlier than in poorer ones. In the U.K. and Denmark, for example, the nadir comes at 44. By the age of 70, people in these countries are as happy again as they were at 30 and things only get better as they get older.

There can be any number of reasons for that, ranging from antidepressant use to late-life work that's done for pleasure more than anything else. One down-to-earth explanation, though, is the growing intergenerational wealth divide. Financial security in advanced societies appears to increase with age.

Pia Huettl, Karen Wilson and Guntram Wolff document the phenomenon in a recent paper for Brussels-based think tank Bruegel. They found that the material deprivation rate -- defined as inability to afford things above basic necessity level -- has increased for young people in most European countries between 2007 and 2013, but dropped for over 65s. That's mainly due to rising youth unemployment. In 2008, only 15.2 percent of people aged 15-24 were out of work in the European Union; in 2013, youth unemployment reached a peak of 23.7 percent, falling to 21.4 percent by the end of 2014, according to Eurostat. That rate is more than twice as high as for the total labor force.

It's always harder for young people to find work during recessions, simply because they are less experienced both at the work itself and at searching for it. It's also easier to lose work, because jobs for young people are often tenuous part-time arrangements. So there's nothing particularly surprising about the rise in youth unemployment as such. What's less intuitively clear is the role that government policy plays in widening the inter-generational wealth divide. During the recent recession, programs that might have helped younger people were generally cut. Old age programs increased:


Growth in old-age benefit spending was faster even in countries, such as the U.K., where expenditure on health and support for families increased in 2008-2013. "Pensioners were the main beneficiaries of fiscal adjustments," Huettl and her collaborators write. 

In many countries where pension reforms were introduced, they tended to favor current retirees over future ones. An equitable pension system keeps the so-called benefit ratio -- that of retirees' income to the earnings of the working population -- stable over time. Greece, Spain, Cyprus, Romania, Hungary all skewed their reforms in favor of their current generation of pensioners. Of the severely crisis-hit countries, only Italy was an exception, making its pension system fairer to the young people of today.

Older people are getting more out of governments, because they are over-represented in politics. In a 2010 paper, Susan Scarrow and Burcu Gezgor showed that the proportion of European political party members over the age of 60 has increased since the 1990s, and often out of proportion to their share of the general population:

Old People's Parties

Share of people aged over 60 in European countries in the 2000s

Source: Scarrow, Gezgor, 2010

It may be a coincidence that countries with political party memberships younger than the general population, such as Portugal, Spain and Greece have powerful leftist parties capable of upsetting established political balances. Somehow I don't think so, though. The radical leftists in these countries are usually younger people who don't want their generations to turn into lost ones. They may not necessarily know how to prevent this, but their efforts show that class warfare may be mutating into a fight against generational inequity.

This is something for older politicians to think about. Reorienting social systems to fight youth unemployment, and to prioritize education and young families might be a safer choice than trying to secure retirees' more reliable votes. The reorientation is psychologically difficult: Today's middle-aged were once young and remember those times as happy, their youthful resilience as boundless. Yet the lack of opportunity does foster drug epidemics, riots and the radicalization of electoral politics. It also helps create demographic troughs like the one in which Europe now finds itself: Today there are four workers per retiree in the EU, but according to the European Commission's forecast, there will only be two by 2040. Who knows what that might do to the happiness U-curve: It might even turn into a downward-sloping line.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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