miles travelled by Q1 individuals are by car, not much less than the 85 of the richest individuals.
Poor households spend a large part of a limited income on the car because old cars may be cheap to buy, but all cars are expensive to run. As Table 2 showed,
for Q1 households 6.3 of all expenditure is on motoring, so that the one-third of Q1 who actually run cars spend a stunning 20 of their small incomes on
motoring. By contrast in Q5 households, 11.3 of all expenditure is on motor- ing, and 94 of Q5 households run at least one and quite often two cars per
household. Q1, Q2 and even Q3 can only run a car at significant sacrifice. Our interviewees from an estate in the outer London district of Epping Forest
confirmed this, when asked about what they had to forfeit to afford the costs of motoring:
‘cars are getting dearer to run. I’m cutting things out here and there to keep the car on the road’
‘I would spend the money saved on a car on the kids––they’re the next most expen- sive thing’
‘I would spend the money saved on clothes or holidays’ ‘I don’t eat so much as before. I don’t have luxuries because of the driving costs . . .
I would spend more money on food if I had no car’ ‘I would spend the money saved on beer’.
We have come all the way from Rowntree’s poor, who could not afford a decent meal because of drink, to the motoring poor who cannot afford a decent drink
because of their petrol costs. It is also worth noting that these households make their sacrifice for old cars, which do not offer reliable transport or predictable
expense, so that the car is part of an insecure and precarious lifestyle because the job cannot be held without a car and vice versa.
After analysing the insecurities of working households in a cheap jobscheap goods society, we turn now to consider retirement, the next stage in the house-
hold’s life course, where again inequality breeds inequality under systems of funded retirement which have consequences for the waged as much as the
unwaged.
3. R
ETIREMENT VIA FUNDED PENSIONS
As individuals live longer, so the question of provision for their retirement becomes more important. Those now surviving to official retirement age at 60
or 65 can expect to survive for a further 10 to 20 years and those who take early retirement can expect 25 years or more without wages. Thus many must expect
a lengthy period when their standard of living depends on their pension arrange- ments. Provision for old age varies between advanced capitalist countries, which
variably emphasise state, occupational or private schemes. These impose differ- ent obligations about contributions and also give different rights to benefit. Many
state schemes, including the exiguous British flat-rate social insurance pension, operate on an unfunded, pay-as-you-go basis with this year’s contributions from
those who are earning paying the pensions of those who are already retired. By contrast, the dominant form of UK and USA retirement provision, via second
tier arrangements, involves occupational andor private schemes that build up individual funds for each contributor. US and UK funded pension arrangements
are also increasingly characterised by defined contribution arrangements where the employer takes no responsibility for guaranteeing the value of the pension
and individuals accumulate their own fund whose value at retirement will deter- mine the value of the pension.
The social coverage and economic performance of funded provision has now become an important economic and social issue in the UK, USA and other
countries that have followed their path. This section discusses how households’ funded provision for retirement relates to income: when only some households
have sufficient income to allow them to build up a fund, funded pensions have become an important accelerator of inequality. There are also important
indirect macro effects because the pension funds of fortunate higher income households are invested in a coupon pool of securities, often in company shares,
where investment expectations and decisions have economic effects on a much larger group of households. The argument of this section is that reliance on
funded pensions directly accelerates household inequality and indirectly adds a variety of macro economic insecurities.
The first, most important fact about funded retirement is that, in the US and UK, only the fortunate 40 of households in Q4 and Q5 have the discretionary
income to forego current consumption and make long term savings sufficient to provide individuals or households with financial security in old age. Table 6 shows
that, in the UK, households in Q4 and Q5 allocate a significant portion of their expenditure to savings and investments 10.4 and 13.6 respectively. By way
of contrast, Q1 to Q3 start from much lower absolute income levels and are unable to raise the percentage of income saved above 8. Table 6 shows that Q4 and
Table 6
Distribution of UK household income and savings £ per annum 19967, by quintile
Q1 Q2
Q3 Q4
Q5 Q4 plus
Q5 as of total
Gross income 5985
11 245 18 656
27 741 48 261
67.9 Disposable income
5935 10 746
16 383 23 160
37 893 64.9
Savings and investment 144
487 1197
2420 5172
80.6 Savings and investment
2.4 4.5
7.3 10.4
13.6 as of disposable income
Source: Family Spending, ONS 1996–7. Notes: Gross income is income before tax and includes wages and salaries, self-employment income,
private and government retirement income, interest, dividends and other income. Disposable income is income after taxes and benefits. Savings and investment includes investments in life and other personal
insurance plus pensions contributions and other savings.
Q5, which account for 65 of disposable income in the UK, are responsible for 80 of total household savings in the UK.
After making various assumptions, it is possible to calculate how much must be saved so as to generate a satisfactory income in old age. Disney et al. 2001
estimate that, assuming real earnings growth of 2 and a real return on savings of 5 per annum, an individual who continuously saved 10 of their income
over a 40 year working life could generate an annual pension equal to just over 30 of their final earnings over 25 years of retirement p.85. A saving rate of
15 of income would be necessary to allow for short periods of interruption to work and adding in the extra income from a basic state pension and lower
estimated living costs in retirement, would together provide a more comfortable replacement rate of 50–60 of final earnings. These calculations about savings
rates are consistent with practice in many defined-benefit occupational schemes, where contributions from employer and employee generally fall between 10 and
15 and generate a fairly comfortable retirement for those with long service Disney et al. 2001: 85–6.
Lower income households should save a higher percentage of income because a steady 10 contribution only generates a living pension if absolute household
income is reasonably high. The typical income of a Q2 working household is so low as Table 1 showed that even 50 or 60 replacement would not provide a
very generous pension. And steady contribution is difficult for those who have no surplus income after immediate basic living costs. When lower income house-
holds inevitably do save a lower percentage of their modest incomes, they fail to generate a satisfactory replacement for income in old age. The acceleration of
inequality then becomes part of the logic of contribution because only Q4 and 76
Table 7 Sources of income £ per year for UK retired households, 1994–95
Q1 Q2
Q3 Q4
Q5 Q4 plus
Q5 as of total
Original income 736
1391 1980
4647 15 139 82.8
of which: Occupational pension
385 928
1388 3340
9647 82.8
Investment income 304
328 408
1015 4311
83.7 Other
47 135
184 292
1181 80.1
Benefits: State retirement pension
3476 3807
3788 3762
3647 Non-contributory benefits
586 1001
1443 1460
1181 Total average income per
household 4798
6199 7211
9869 19 967
Source: Family Expenditure Survey, Economic Trends, Office for National Statistics. Note: Retired households are arranged in order of household income, with Q1 the lowest and Q5 the
highest income retired households.
Q5 households can effectively participate in self-provision of funded retirement income.
Thus current income inequalities are replicated later in the life cycle of house- holds when retired. Table 7 demonstrates this point by considering the incomes
of currently retired households in the UK. The richest 20 of retired house- holds in Q5 have income levels boosted by occupational pensions and invest-
ment income, so that Q5 income is five times that in Q1 retired households, whose members live on a meagre state pension which has been uprated in line with ris-
ing prices not incomes. The poorest retired households in Table 7 in turn become the bottom fifth of all households. Table 1 showed that in the UK Q1 is dis-
proportionately a group of those who are subsisting on state benefits. Half of Q1 and 45 of Q2 heads of households are retired with the remainder mainly
unemployed so that most of Q1 and 60 of Q2 household income comes from state benefits.
The increasing dependence on funded pensions, with savings routed through the coupon pool, creates an immediate social problem. In the UK and US, where
the state encourages dependence on and indeed provides tax incentives for funded provision for old age, around a half of households are excluded because
their voluntary savings will never be sufficient to produce an adequate income in old age. This acceleration of inequality creates social problems about poverty
in old age, as the poorest retired households need additional top-up benefits. It also creates new economic problems because funded provision for retirement
directs huge flows of household savings into the coupon pool of securities with all kinds of macro and meso economic consequences.
In the UK, the annual flow of funds into long term funded savings, which includes pensions as well as life assurance policies, equals the value of all pro-
ductive investment made by industrial and commercial companies at around 8.5 of GDP. In the US, this flow is proportionately larger and is equivalent to 13
of GDP, or around 160 of corporate productive investment.
3
Transitional economies are being encouraged to establish funded pensions because these will
increase the flow of household savings into domestic capital markets to stimu- late development. But, in countries like the UK and US, the size of existing flows
raises a rather different series of questions about the economic consequences and risks of the huge existing flows into stock markets whose value is considerably
in excess of national GDP.
These consequences are now being discussed by macro economists, like Boyer 2000, who has discussed the possibility of a wealth-based growth regime that
would inaugurate a new era of dynamic instability. Boyer’s theoretical model sug- gests provocatively that, if wage and commodity inflation was the problem of the
long boom, asset price inflation may be the problem of the new millennium. As in other regulationist work, it is not easy to be sure about the relation between
the ideal type model of a growth regime and the behavioural dynamics of real existing national economies. But, in the UK and US cases, two outcomes are
relatively clear. First, asset price bubbles will result when large flows of savings search for coupons that represent investment opportunities. Second, there will
be changes in corporate behaviour when the professional managers of household savings seek higher returns.
In the UK and US, we already have some experience of boom and bust in share prices. Through the decade of the 1990s, in the UK and US, share prices went
up by 10–20 per annum. This rise in prices was the main source of gains for investors and fund managers so that 80 of the stock market gains of the decade
came from stock price appreciation, not distributed dividends. At the end of this period, stocks were trading at average price earnings pe ratios of 24:1 in the
UK and 29:1 in the US, well above their normal range of 5 to 15 times. This ‘irrational exuberance’ Shiller 2000 led to increasing unease about the possi-
bility of continued future gains when the rising pe ratio indicated a disconnect between market prices and the corporate sector’s capacity to generate earnings,
especially in the tech sector where new economy hysteria had bid up share prices. A stock market crash in the US tech sector in April 2000 spread to the main
markets, where an unsteady decline in prices has continued as the economy moved into a tech-led downturn in 2001 amidst profit warnings and a switch-off of tele-
coms investment.
Recent experience shows that falling share prices have all kinds of macro con- sequences, which depend on the nature of the correction and local circumstances.
In the event of sustained collapse in share prices, as in Japan, there will be all kinds of questions about the solvency of banks and insurance companies that hold
shares on their balance sheets. If shares are held directly by households, as in the US, the wealth effects are likely to encourage household consumption on the
upswing and depress it on the downswing. In the UK case, these consumption effects are less immediate because most households do not hold shares directly
but all households must live with the consequences of fund under-performance as share prices fall. In the UK, equity yields have fallen from 19 13 to 15
in real terms through the 1980s and 1990s to a current estimated long term return on equities of no more than 8 before tax on dividends and management
charges Financial Times 21–22 July 2001.
Falling equity returns highlight the point that saving through the stock market for long term retirement in the UK and US is increasingly a system that
passes risks to the individual saver and hisher household. UK occupational pen- sion schemes in the public sector and blue chip corporations were traditionally
defined benefit schemes where those with a full set of contributions were guaranteed a fixed percentage of final salary, with the employer making good any
deficiency arising from fund under-performance. More recently, we have growth of private pensions, which operate on a money purchase or defined contribution
basis, and many employers are closing defined benefit final salary schemes to new workers as they attempt to renounce the social obligations they once
honoured Cutler Waine 2001.
When the risk of under-performance has been passed to households, their attempts to solve the problem are likely to make things worse. An individual with
an under-performing fund can only achieve desired benefits by increasing contributions, which reduces current consumption and augments the possibly
destabilising flow of funds into the market. Under-performance in the main stock market encourages funds to seek out different kinds of coupons that may offer
higher rewards. The problem is compounded in the UK by the Treasury policy of paying off national debt and thus reducing the amount of government bonds
available. The shift into alternative investments has so far been more prevalent in the US than in the UK, where the regulatory regime has inhibited this devel-
opment. In the US, the tech stock crash has not stopped a large flow of funds into venture capital at an annual rate of 100 billion and it has encouraged a renais-
sance of hedge funds that manage 400 billion and are engaged in shorting a falling market Business Week. The possibility of higher rates on return on such
investments is accompanied by higher risks that may or may not be appropriate for pension funds aiming to provide security in old age.
Meanwhile, when declining share prices undermine returns, the market inten- sifies its pressure for shareholder value from increased earnings. However, the
empirics suggest that these pressures from households and their fund managers meet the obstacle of activity-based limits on return on capital employed ROCE.
Even in the good years of the 1990s, most large UK and US corporations struggled to meet the 15 ROCE expectations of the capital market Froud
et al. 2000. The firms that performed best in terms of ROCE generally operate in activities like media, telecoms or pharmaceuticals where they have the advan-
tages of immateriality, property rights, market power or rapid growth. Though, as telecoms shows, when demand conditions worsen, even high performing
sectors experience difficulties in sustaining profitability and returns.
A corporate sector which struggles to meet the expectations of the market must increasingly rely on widespread restructuring, cheap tricks at the expense of labour
and suppliers who represent the firm’s major costs and a good deal of oppor- tunist financial engineering to increase shareholder value in the current year. The
end results are complicated but already we see what the French call ‘stock market redundancies’ in firms whose problem is not chronic losses but simply
not enough profit. Lazonick and O’Sullivan’s 2000 descriptor, ‘downsize and distribute’, may not have been generally adopted in the 1990s, but staff redun-
dancies have become more or less obligatory for management announcing a fall in profits or even an increase which is below market expectations. Thus funded
provision for retirement acts through the labour market to increase the risks of redundancy for all households, including those households who make no provi-
sion for the future through the stock market.
These macro dynamics create a distinctive micro experience of Brechtian insecurity, which bears on the inhabitants of the villas as much as the inhabitants
of the shanty towns. Households in Q2 see the value of state retirement bene- fits continually eroded in relative terms and do not save enough out of current
income to build a fund. These households are now the target of UK government policy to widen private pensions through new schemes such as the Stakeholder
Pension see Department of Social Security 1998; House of Commons 1999. But low incomes and unstable work patterns militate against the success of
such initiatives. The long term prospect for Q2 households is of the effective
disinvention of retirement because Q2 individuals must literally work until they drop and rely on employers to recreate lighter and less responsible jobs for the
old. A different set of problems confront those Q3 and Q4 households in the middle income groups. These households are making some provision, often at
the expense of current consumption, but their future is precarious because their provision may be inadequate if the stock market performs poorly, annuity rates
fall or working lives are shortened.
Table 8 illustrates the uncertainties inherent in private pension provision, where individuals bear all the risks associated with labour and capital market uncertainty
and imponderables about the number of working years when contributions can be made, the accumulating value of the fund and the annuity rate it buys at the
point of retirement. Our illustration shows that, assuming a long working life of 44 years where weekly contribution levels of £9 in real terms are maintained
throughout, the capital market could deliver a retirement income somewhere between £90 and £175 per week. For the individual or household that controls
none of the imponderables, the process of saving for retirement is rather like a lottery where every ticket wins a prize but only some prizes are worth having.
The metaphor of lottery reminds us that the end result is not a systematic accel- eration of income inequality because this effect is crosscut with generational and
gender effects, so that some households and individuals do much better than others that started from the same point. The high returns on equity through
the late 1980s and 1990s, followed by low returns in the 2000s as well as falling annuity rates also imply generational effects, where accidents of timing mean
that some households’ funds have performed well while others encouraged by advertisements about the attractive past performance of investments will fail to
deliver. Women also face particular problems in a society where funded invest- ment is expected to provide security because many including divorcees and
widows are still covered indirectly by the contributions and funds of men who were continuously employed at higher wages.
On reflection, Brecht was wrong insofar as he implied constant pressure bear- ing down on everybody all the time because the lottery has many winners as well
Table 8 An illustration of the variability of private pension income from a weekly £9
contribution
The ideal scenario A less fortunate
outcome
Years of working life 44
44 Average annual real investment
return 4.25
3.25 Accumulated fund at retirement
£130 000 £75 000
Weekly pension based on a high annuity rate current prices
£175 £100
Weekly pension based on a low annuity rate current prices
£156 £90
Source: The Observer 9 March 1999.
as more losers. All those in employment as members of households in the top 40 of the income distribution have benefited hugely from the 10–20 per
annum share price rises in the bull market of the 1990s, although of course, there is an increased labour market risk of stock market redundancy in mid-career.
British companies have laid off many staff in the last 15 years, but some of those were long term employees who were bought out with enhanced pension contri-
butions and others who remained have well paid jobs and a few have stock options. As for the losers, in a society that pushes funded investment, they will often only
realise their fate as individuals when, towards the end of their employment career, they discover that their fund will only buy a small annuity, or when the private
pension company writes to explain that the fund has under-performed, requir- ing additional contributions in later years to make up the deficit. Our popular
politics is partly defined by these anomalies which diffuse euphoria and postpone glum realisation as many ticket holders still hope to win in what is a kind of house-
hold lottery.
4. I
