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An economic war between the generations has started. It has a lot further to run.
The latest barrage was fired Wednesday when the U.K.’s latest budget took aim at eroding favorable tax treatment enjoyed by pensioners. Earlier shots were fired all over Europe as government after government raised official retirement ages and looked to weaken some of the benefits to entrenched labor.
But so far these measures have been modest. Retirement ages won’t generally go up for years to come, protecting those within sight of their pensions. Expensive tax, welfare and healthcare advantages enjoyed by the current golden age of retirees are only being chipped away at the margins.
But stories of Greeks and Italians collecting full pensions from their mid-40s sit ill next to high youth unemployment rates. In Spain, for instance, the unemployment rate among 15- to 24-year-olds is 48%, with the rate hovering at around 25% in the euro zone overall.
When the debt binge was going on and people could use inflating asset prices to pretend they were better off than they thought they were, generous benefits to the older generation, including early retirement and favorable tax treatment seemed not only affordable, but fair.
But only as long as those working now and about to enter the workforce could see themselves getting the same rewards after a lifetime’s — or, more likely, half a lifetime’s — worth of paying into the system.
These days, people are reconsidering. Redistribution from the old and asset rich to the young is already starting, though it will take considerable time before it’s complete.
In the U.S., house price falls have reduced the costs of setting up home for the young at the expense of the old. In continental Europe, it will take the form of reducing pension benefits and opening up of the labor market.
Everywhere it will entail eroding the transfers of old people’s savings to the young. In part this will be accomplished through taxation of wealth and pension benefits. But mostly it will come about through inflation.
That’s the ultimate purpose of the huge amounts of liquidity across the developed world, even if central bankers won’t admit it. The point is to stoke enough inflation to transfer wealth from the old to the young.
It’s worth noting that in the U.S. consumer debt has, on a quarterly basis, been rising at a stronger pace than even during the pre-crisis credit bubble. A substantial part of this growth has been in student loans. Ultimately, inflation will erode the real value of this debt.
And in Japan, the huge volume of government debt is almost exclusively held by domestic investors and most of those investors are pensioners. Here too, inflation will lead to an intergenerational transfer.
The fear is that otherwise, the young will lose patience. And when they do, they’ll start taking the wealth for themselves–last summer’s London riots might just be a foretaste.
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The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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