It's financial war!

The baby boomers have been a very lucky generation. Life will be tougher for those who came afterwards. I reckon there will be plenty of heated financial arguments at family dining tables.

If you were born between 1945 and 1965, you’re lucky. As one of the ‘baby boomers’, there’s a good chance you’ve led a bit of charmed life financially while your kids won’t do as well.

I say this after reading a fascinating book called The Pinch – How the baby boomers took their children’s future. It’s by David Willetts, a Tory MP who is currently the Minister for Universities and Science.

So let’s look at seven reasons why the baby boomers have had it so good:

1. High inflation helped homebuyers

Many older baby boomers were able to buy property in the ‘70s. At the time interest rates were high, so it seemed a tough challenge. But actually high inflation meant the boomers’ mortgage debt was eroded by rising prices.

2. A long house price boom

Baby boomers profited from a long housing boom where house prices rose much faster than earnings.  Between 1987 and 2006, house prices rose on average by 1.9% more each year than real wages.

3. Gold-plated pensions

Many baby boomers are members of excellent ‘gold plated’ final salary pension schemes. Sadly, many large employers have closed these schemes for new employees, so younger folk will have to make do with less attractive defined contribution schemes.

4. Low inflation while they retire

Inflation is good news for young homebuyers with lots of debt but it’s not normally a positive for pensioners. High inflation means that the value of pensioners’ savings falls more quickly. What’s more, many pensioners don’t have index-linked pensions, so they want price rises to stay as low as possible.

Right now, the first boomers are retiring and they’re benefitting from relatively low inflation (3.7%, compared to say, 15%). Of course, that may change in the long-term, but I doubt we’ll see double digit inflation for a long time.

I know that I’ll get a barrage of complaints for suggesting that we live in a relatively benign environment for pensioners. The complainants will point out that interest rates on savings accounts are very low – it’s hard to obtain a higher return than 3% at the moment.

There’s some truth in the complaint. Even when you take the low level of inflation into account, savings rates are low thanks to the Bank of England’s ultra-low base rate. However, if I were a pensioner I’d always prefer a low inflation environment than a high inflation one.

5. They spent the housing profits

Let’s look at an imaginary baby boomer called Terry. He was born in 1955 and bought his house in 1985 for £50,000. As the value of his house soared, it made little difference to his life for a long time. All that mattered was paying off his mortgage each month.

But in the noughties, the value of his home hit £250,000 and he couldn’t resist remortgaging. As a result,  he withdrew £50,000 of equity from his home. That meant he had more money to spend but less wealth to pass onto his children. Terry’s kids were then faced with very high property prices in the noughties while knowing that they were less likely to inherit the full value of their dad’s home.

You could argue that it was Terry’s money to do with as he saw fit. That’s true. But these property profits weren’t down to Terry ‘s hard work. He just got lucky. Many other baby boomers behaved in the same way.

6. A big generation

From the mid-40s through to the mid-60s, the birth rate was unusually high in the UK. You might think that an unusually large group of youngsters would have a bad time economically. After all, there would be more bodies competing for the same number of jobs, wouldn’t there?

In reality, that’s not what happened. Instead from about 1985 to around 2005, the UK economy benefitted from having a large number of workers in their peak years of productivity.

7. Look at the wealth!

Just look at Willetts’ estimate of how wealth is distributed in the UK:

All the above figures are in trillions of pounds!

Now I’m not suggesting that all boomers are rich. Alongside some rich folk, there are many financially stretched people in that age band – for all sorts of reasons. I also accept that some boomers will be fed up if they're about to retire. I explained why in A rotten year to retire.

But overall, I think it’s clear that the baby boomer generation has done well.

What can the young do?

I worry that some young people are going to get very angry when they realise what has happened. The student protests may be a harbinger of what is to come. I also fear that some families may be damaged by inter-generational arguments about money.

I just hope that the young can keep their temper under control and take the mature approach. That’s to be as prudent as possible and draw up a financial plan. Assume that no one else is going to look after you. That will drive you to do everything you can to save money for your future.

I keep banging on financial plans in lovemoney.com articles but I really think it’s crucial if you want financial security. If you don’t know where to start in that process, read Five steps to reduce your financial fear.

A word about me

Just so there’s no doubt, this article hasn’t been driven by personal resentment. I’m 43 - just too young to be a boomer - but I’m very aware that my life has been blessed in many ways. That includes financially as I was lucky enough to inherit money when I was quite young.

I just feel sorry for the younger folk who face a much bleaker outlook.

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