USS and the dangers of inter-generational wealth transfer

Using tuition fees to plug the Universities Superannuation Scheme’s £17.5bn pension deficit is a clear example of how the transfer of wealth from young to old presents a real threat to long-term societal and economic sustainability. ​

The fact that the Universities Superannuation Scheme (USS) gained an impressive 20.1% in 2016-17 and meaningfully cut costs has been largely overlooked in the press. Focus has instead centred on the growing deficit, which reached £17.5bn, making it the largest pension black hole in the UK.

​While I can empathise with USS’s dilemma - despite generating 12% returns a year over the last five years, the staggering growth in their liabilities has been largely driven by falling interest rates and lower yields on UK government bonds, factors that are outside the scheme’s control - it raises alarm bells about the long-term prospects for Britain’s economic and societal sustainability.

The scheme has yet to make clear how it plans to plug that hole, but in the meantime, experts have pointed to tuition fees as part of the solution. The options being presented are that either fees have to go up, or fees stay the same, but more money is diverted away from teaching to fund the pension promises made to USS’s 390,000-strong academic membership.

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Higher fees
The first option - raising fees to help plug the deficit - effectively means students are paying more for their education in order to fund pensions for the older generation. This would likely create two outcomes: firstly, fewer students can afford to attend university; secondly, graduates would leave with more debt and therefore be less able to save for their own retirement once they entered the workplace. 

In societal and economic terms, the outcome of this first option would be dismal. Britain’s workforce will be less-educated and, therefore, less able to compete on the global stage. This is bad for our economic growth prospects in the long-term. 

Future generations of workers would also be more dependent on the state to provide pensions and other benefits, such as healthcare, later in life. Taxes would have to go up to fund this, making tomorrow’s workers even less able to save for their own pensions. National debt would likely increase, another negative for the economy in the long-term, and government resources may have to be diverted from other important areas (such as the environment).

Same fees, less education
The second option - keeping fees the same, but diverting money away from actual education - is no better. Lower funding for research and academic staff means lower education standards. Under this scenario, as with the higher fees option, Britain’s graduates will be less able to compete with their global peers. And, even if they don’t get saddled with even greater debts, the lower education standards is likely to press down on their earning potential as international competition for jobs increases massively. They are therefore less able to save for their own retirement, creating the same kind of pressure on the economy and government resources.

This option is also unlikely to create positive economic or social outcomes in the long-term.

There is no clearer example of the real, long-term dangers of transferring wealth from the young to the old. Our economy and our society needs a more viable solution to this pensions crisis, which spreads far beyond just USS. Pension benefits will have to be cut and/or means-tested, the retirement age will have to go up and central banks will have to start thinking about these long-term implications of ultra-loose monetary policy.