Breakingviews – Generational wealth gap warrants post-Covid reset

LONDON (Reuters Breakingviews) – Covid-19 predominantly attacks the lungs, but with young people it goes straight for the wallet. The pandemic accentuates a wealth divide between millennials and the old, making a policy reset necessary.

Younger people already had a dwindling share of the West’s riches. In America, under-40s held 8.6% of the country’s assets in 2019, compared with 16.9% in 1990. In 2019, Brits in their early 30s had 20% less wealth than those born in the 1970s did at the same age, the Institute for Fiscal Studies said. Soaring real-estate prices have stopped young people getting on the property ladder. A decade of loose monetary policy has pumped up equities, mostly owned by oldies.

The pandemic twists the knife. Lockdowns decimated industries with mostly young staff, like hospitality and retail. That dents youths’ longer-term employment prospects and makes wealth accumulation impossible. In mid-2020, the percentage of 15 to 24-year-old Americans and Canadians in employment fell to around 40% – lower than after the last financial crisis, according to the Organisation for Economic Co-operation and Development. European data is flattered by job-retention schemes, but they’ll end.

Second, debt has ballooned. General government gross borrowings will on average be 124% of GDP in advanced economies in 2020, compared with 76% in 2005, using International Monetary Fund figures. Spending big is the right response to Covid-19, but debt-shy governments might then hike income taxes, hitting today’s young throughout their lives.

One solution is to tax wealth rather than labour, easing the pain for working millennials compared with wealthy older people. Equalising capital-gains and income tax rates, as proposed by U.S. President-elect Joe Biden, would be a start. Introducing a temporary 1% wealth tax could raise 260 billion pounds ($350 billion) in Britain, according to the London School of Economics’ Wealth Commission. Another radical move would be to just give young people money. Britain’s Resolution Foundation think-tank once floated the idea of a 10,000 pound 25th birthday present, funded by higher estate taxes.

It’s a fairer policy than forgiving student debt, which only helps college-educated millennials. And funding it with higher inheritance taxes should cancel out the benefit for youths with rich families, meaning the cash flows where it’s needed. The gray vote might want to attach some strings to the money. Fair enough. The Resolution Foundation recommended that it should only be used for housing, education, pension investing or starting a business. That should ensure the cash handouts lift young people out of their financial predicament, rather than helping them drown their sorrows at the bar.

– This is a Breakingviews prediction for 2021. To see more of our predictions, click here