Middle class families face a triple whammy
Falling pensions, cuts and the banking crisis will impoverish many families, says Edmund Conway.
By Edmund Conway
Published: 9:05AM BST 01 Jul 2010
You don't usually expect radical neo-Marxism from the International Monetary Fund – the last great bastion of capitalism, spreading the gospel about the free market to the furthest reaches of the world. And yet, hidden away in an obscure IMF report a few years back is a short sentence that explains precisely the problems that Britain, and the rest of the Western world, have been sleepwalking towards for years.
The claim made by the IMF's Financial Stability Report in 2005, in a seemingly throwaway remark, was that households had become the financial system's "shock absorber of last resort". In other words, whereas in previous eras, much of the pain of recession and financial crisis was borne by businesses or governments, with families afforded some degree of protection by the pensions system or welfare state, it was now households who were far more likely to face the music.
At the time, the idea received little attention. But it has truly radical implications for economics and politics around the world. This is not merely about the financial crisis, but something more deep-seated: the way in which wealth is distributed around society. It is about the middle classes, and why they have become the biggest victims of all.
The problem is that families face a threefold threat to their prosperity. The first issue – the one that the IMF was originally focusing on – is pensions. Not so long ago, households were lucky enough to receive gold-plated pensions that would guarantee a certain pay-out upon retirement. Most companies have closed their schemes after realising they are simply unaffordable. The public sector at last looks like following suit, if the BBC's decision this week to reduce the generosity of its pension plan is anything to go by.
This is, in the IMF's words, a "quantum leap". Suddenly households have gone from being able to rely on a constant stream of legally protected income from their employer to having to manage their own investments (as they technically do under the new breed of pensions).
This would be fine if one could be assured that most people would have either the time or the inclination to understand these new responsibilities. But every piece of evidence – academic and anecdotal – suggests that they do not. The result is that the majority of households are heading blindly towards a future of relative poverty.
The second issue is that the welfare state has become unaffordable, and yet many of Britain's poorest families have become overly reliant on it. Here, too, there is to be a reckoning. Whereas Gordon Brown used his first Budget to save money by grabbing an annual £6 billion from pension funds (and the middle class), George Osborne used last month's emergency Budget for a similar-sized grab on the welfare class. Re-indexing tax credits against a lower measure of inflation will cost Britain's poorest families billions by the end of this parliament.
And it is not merely that the middle class and the poorest have found themselves squeezed so hard: it is that so much of the extra cash generated during the boom years (and even after them) has been actively funnelled towards the most wealthy. The median wage in the US, adjusted for inflation, has been stagnant for pretty much three decades. But the figures at the high end of the scale have soared; whereas in 1970 the average US chief executive made $25 for every dollar of their typical employee's salary, today the figure is more like $90.
Much of this disparity is down to globalisation. When the world is changing fast, those qualified to deal with the technology du jour (be it the steam engine or the internet) will earn more than their peers. But the fact remains that not only is inequality at the highest level since the Thirties, the pension and welfare systems set up then for the express purpose of levelling this divide are in an exponential decline, threatening to widen the gulf further.
Moreover, there is good reason to suspect, as Raghuram Rajan points out in his new book, Fault Lines, that policy-makers have only been able to persuade people to live with this manifestly unfair situation by pumping up ever bigger booms in the property and stock markets to give them the impression that they are actually making money. Now that the bubble has burst and debt is harder to procure, that illusion has evaporated.
All this before one even takes into account the third problem for households – that they are having to bear the costs of the clean-up for the financial crisis. The austerity budgets being imposed across Europe will mean that families are taxed more and receive less in the way of welfare and public services. Police numbers will be cut; university fees are likely to rise further. In other words, the cost of trying to live a stable, contented middle-class life will balloon.
So I have one simple question: when do the politicians intend to let the public know about the fate that awaits them? The longer they put it off, the nastier the reaction, the bigger the strikes and the greater the chance that governments will fall. Don't say you weren't warned.
By Edmund Conway
Published: 9:05AM BST 01 Jul 2010
You don't usually expect radical neo-Marxism from the International Monetary Fund – the last great bastion of capitalism, spreading the gospel about the free market to the furthest reaches of the world. And yet, hidden away in an obscure IMF report a few years back is a short sentence that explains precisely the problems that Britain, and the rest of the Western world, have been sleepwalking towards for years.
The claim made by the IMF's Financial Stability Report in 2005, in a seemingly throwaway remark, was that households had become the financial system's "shock absorber of last resort". In other words, whereas in previous eras, much of the pain of recession and financial crisis was borne by businesses or governments, with families afforded some degree of protection by the pensions system or welfare state, it was now households who were far more likely to face the music.
At the time, the idea received little attention. But it has truly radical implications for economics and politics around the world. This is not merely about the financial crisis, but something more deep-seated: the way in which wealth is distributed around society. It is about the middle classes, and why they have become the biggest victims of all.
The problem is that families face a threefold threat to their prosperity. The first issue – the one that the IMF was originally focusing on – is pensions. Not so long ago, households were lucky enough to receive gold-plated pensions that would guarantee a certain pay-out upon retirement. Most companies have closed their schemes after realising they are simply unaffordable. The public sector at last looks like following suit, if the BBC's decision this week to reduce the generosity of its pension plan is anything to go by.
This is, in the IMF's words, a "quantum leap". Suddenly households have gone from being able to rely on a constant stream of legally protected income from their employer to having to manage their own investments (as they technically do under the new breed of pensions).
This would be fine if one could be assured that most people would have either the time or the inclination to understand these new responsibilities. But every piece of evidence – academic and anecdotal – suggests that they do not. The result is that the majority of households are heading blindly towards a future of relative poverty.
The second issue is that the welfare state has become unaffordable, and yet many of Britain's poorest families have become overly reliant on it. Here, too, there is to be a reckoning. Whereas Gordon Brown used his first Budget to save money by grabbing an annual £6 billion from pension funds (and the middle class), George Osborne used last month's emergency Budget for a similar-sized grab on the welfare class. Re-indexing tax credits against a lower measure of inflation will cost Britain's poorest families billions by the end of this parliament.
And it is not merely that the middle class and the poorest have found themselves squeezed so hard: it is that so much of the extra cash generated during the boom years (and even after them) has been actively funnelled towards the most wealthy. The median wage in the US, adjusted for inflation, has been stagnant for pretty much three decades. But the figures at the high end of the scale have soared; whereas in 1970 the average US chief executive made $25 for every dollar of their typical employee's salary, today the figure is more like $90.
Much of this disparity is down to globalisation. When the world is changing fast, those qualified to deal with the technology du jour (be it the steam engine or the internet) will earn more than their peers. But the fact remains that not only is inequality at the highest level since the Thirties, the pension and welfare systems set up then for the express purpose of levelling this divide are in an exponential decline, threatening to widen the gulf further.
Moreover, there is good reason to suspect, as Raghuram Rajan points out in his new book, Fault Lines, that policy-makers have only been able to persuade people to live with this manifestly unfair situation by pumping up ever bigger booms in the property and stock markets to give them the impression that they are actually making money. Now that the bubble has burst and debt is harder to procure, that illusion has evaporated.
All this before one even takes into account the third problem for households – that they are having to bear the costs of the clean-up for the financial crisis. The austerity budgets being imposed across Europe will mean that families are taxed more and receive less in the way of welfare and public services. Police numbers will be cut; university fees are likely to rise further. In other words, the cost of trying to live a stable, contented middle-class life will balloon.
So I have one simple question: when do the politicians intend to let the public know about the fate that awaits them? The longer they put it off, the nastier the reaction, the bigger the strikes and the greater the chance that governments will fall. Don't say you weren't warned.
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