Broke: Who Killed the Middle Classes?. David Boyle
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up 110 per cent during the last decade: 17 per cent of them can’t afford holidays and 40 per cent have no savings for retirement.10 This is, after all, the biggest squeeze in living standards since the 1870s according to the economist Roger Bootle.11 There is a financial squeeze going on, and this is what it looks like:
The Mortgage Squeeze Until 1988, mortgages worth more than three times the joint salaries of couples were extremely rare. By 2005, a fifth of all mortgages were based on multiples of four times joint salaries or more. Almost a third of Londoners say they expect to be driven out of London by rising housing costs (a typical London deposit is now £85,000).12 Nor is it just London: Dorset and Wiltshire are actually the least affordable places in the UK. House prices in Truro and Edinburgh have gone up by over 500 per cent in the last quarter of a century.13 House prices have quadrupled in real terms during my lifetime (I was born in 1958), as I said. If they had stayed steady, the average home would now cost £43,000 at today’s prices, rather than £250,000, which is the actual cost.
The University Squeeze The US middle classes have been hit by an unprecedented increase in the cost of going to university, with fees rising from 10 per cent of median income at US public-sector universities in 2005 to 25 per cent now, and the same process is clearly happening here. Already we have £35 billion outstanding in student loans, and the fees look set to burst through the current barrier of £9,000 a year.
The Childcare Squeeze Childcare in the UK is said to be the most expensive in the world, and takes up to 28 per cent of the average income of a two-income family – it costs £5,000 a year for twenty-five hours a week for a single two-year-old in a nursery. This is the main factor forcing a quarter of parents into debt.14 Part of the problem is that, unlike Scandinavia and North America, we have lost our mutually run nurseries – mainly through misplaced fears about ‘safeguarding’, and a general and unaccountable feeling that parents are the last people who should be trusted to look after children.
The Pensions Squeeze The stock-market collapse, and the end of the long boom in stock prices, has meant miserable returns for those private pensions so many of us took out in the 1980s and 1990s. Gordon Brown’s decision to tax pensions income in 1997 looks as if it also reduced the money going into pensions by about £5 billion every year. The number of ‘defined benefit’ schemes open to new members has been falling steadily for a decade and has now trickled down to almost nothing. People are left increasingly with the far less valuable ‘defined contribution’ schemes. Final salary schemes are also being replaced by average lifetime earnings. All this means that most middle-income groups look set to lose 60 per cent of their income in retirement, and low bond yields, low stock-market returns and slowing house prices will put them further at risk.
The Education Squeeze Education is central to the whole idea of the English middle classes, but for a long time now most of them have been priced out of independent education (average fees are now £23,000 for boarders and £11,000 for day pupils, with more for uniforms and extra-curricular activities, and that is for each child) – the ‘preserve of the super-rich’, according to the former High Master of St Paul’s.15 The result is the extraordinary worry and struggle to get into good state schools, which drives up property prices around the best schools by around 35 per cent (up to £77,000 extra).16 This is a nightmare labyrinth, according to a report to the Greater London Assembly, where the middle classes ‘play the system’.17 True, but they play it against each other, putting ever more pressure on their poor overstretched children with frenetic after-school CV-building activities.
The Status Squeeze ‘I feel stuck’ – that familiar cry – said Andrew Schiff, marketing director for the New York brokers Europe Pacific Capital, whose bonus was down to $350,000 and no longer covered private school fees and summer rents. ‘People who don’t have money don’t understand the stress,’ explained the New York accountant Alan Dlugash. ‘I got three kids in private school; I have to think about pulling them out? How do you do that?’18 These are extreme examples, but the same is increasingly true in the UK. Our parents’ generation could feel reasonably secure once they had reached a certain income. Now it doesn’t matter how successful you are – there is always someone paid staggeringly more who can make you feel as if you are struggling, and who pushes up the prices to make it even worse. ‘These people never dreamed they’d be making $500,000 a year,’ Dlugash said about his clients, ‘and dreamed even less they’d be broke.’
There is the middle-class crisis at a glance. It is about money, and about much more than money, but the heart of all this is still house prices, which are the subject of the next chapter. Middle-class homeowners put up with spending between 20 and 40 per cent of their income on mortgages because the prices are rising, and it seems like a more reliable pension than when they invested so nervously and pointlessly in the stock market. Conventional wisdom also suggests that this will at least mean a huge transfer of value from one generation to the next, just in time to pay the vast deposits on their children’s houses – and 63 per cent can’t buy a house now without help from relatives. And it wouldn’t come a moment too soon, because those born after 1985 are the first UK generation not to enjoy better living conditions than those born ten years before.19
But we should hardly hold our breaths, because this cascade of wealth down the generations is actually slowing down. Homeowners need the money for other things. For one thing, they are living much longer and their homes are also their pensions. For another thing, about half of them will need their homes to pay for care bills as they get older, and 50,000 homes a year are already sold to pay for care.
There, in a nutshell, is the heart of the fear: that once the middle classes peer towards their children’s future, there seems no way that they will be able to afford a home themselves. Halifax, now part of the banking conglomerate HBOS, calls this next generation ‘Generation Rent’. They mean children whose parents are homeowners but who will be raising their own children in rented accommodation, and at hugely inflated rents, because rents are also related to the cost of buying property.
How will they ever be able to buy homes or shake off their debts, or even the housing debts of their parents? Especially when policy and economic circumstances have combined to provide an extraordinary shift in resources backwards from the next generation to their baby-boomer parents, the phenomenon outlined by the higher education minister David Willetts in his much-debated book The Pinch. Willetts showed how the baby-boom generation benefited from free higher education, low house prices and inflation to eat away at their debts. And now when the debts are almost paid off, they benefit from low income taxes and low interest rates. ‘The boomers, roughly those born between 1945 and 1965, have done and continue to do some great things but now the bills are coming in,’ he wrote, ‘and it is the younger generation who will pay them.’20
The middle classes – those that dare to look ahead – see their children being flung into a proletarian struggle to maintain any kind of roof over their heads. ‘It is as if your parents die leaving a treasure chest,’ wrote Willetts, ‘and, when you open it, you discover a pile of IOUs which you are obliged to pay.’21
But there is something else going on here which affects the middle classes, however you define them, in many developed countries. Middle incomes in the USA and Canada have flatlined for three decades now. Even in Germany, real monthly incomes have been falling. In fact, the term ‘squeezed middle’ came originally from the United States, where the term ‘middle class’ is usually used to mean what it says – those on average incomes – rather than the extra superstructure of values and social aspirations that the term has come to stand for in the UK.
There certainly is a middle-class problem in the USA, where 4 million families are believed to be in danger of sliding into poverty and one in four middle-class households are about to drop down onto the lower rung, spending a quarter of their incomes just servicing debt.22 It is different over there, but there are important parallels between the UK and USA, which is why the Labour leader Ed Miliband borrowed the American phrase ‘squeezed middle’ in 2011. The parallel has also been noticed by one of the most important commentators on world affairs.