5 September 2016

The capital gap is tearing the generations apart


Ever since the times of Karl Marx, left-wing economists have focused on capital – who owns it, and how can they use it to exploit the working class to make a buck.

Thankfully, Marxist predictions of the proletariat rising up in revolution and seizing ownership of the means of production have rather spectacularly failed to come to pass. But theories of capital ownership are still at the heart of the economic debate – witness the rapturous reception given to Thomas Piketty’s updating of Marx, ‘Capital in the 21st Century’.

Which makes it worth asking: at a time when top-hatted capitalists, flat-capped loom workers and red-shirted demagogues are largely a thing of the past, who actually owns capital today?

While any number of assets from patents to machine presses can be defined as capital – in that they are sources of wealth that allow further wealth to be created – today, capital tends to be held in the form either of property, or of stocks and shares.

When one looks at who owns such capital, one­­ sees a rather diffuse picture. Yes, the landed gentry still own large chunks of the countryside, but there are also millions of leaseholders and freeholders with property of their own.

As for stocks and shares, according to the Office for National Statistics, 54 per cent are owned by foreign institutions and citizens – showing quite how globalised the British economy has become.

Of those held domestically, some of the biggest institutional owners are pension funds, insurance companies and investment funds. These pools of savings are invested in stocks and shares to ensure a steady return to investment to their contributors and savers.

The rebuttal to Marx (and Piketty) is that capital owned through such institutional investors spans class lines. Any steelworker will hold capital in their pension fund, just as any investment banker might hold capital in the form of personal investments.

To say that this makes capital ownership equal would of course be absurd. But despite these inequalities, most working people today, of whatever class, do seem to own at least some.

Or do they?

The truth is that there is a great dividing line in terms of capital ownership in Britain – but it is along the lines of age, not class.

For the majority of millennials, it turns out, capital ownership is a pipe dream.

Millennials (an age bracket into which I myself fall) have far lower saving rates than our parents. In the US, according to Moody’s Analytics, adults under 35 have a savings rate of negative 2 per cent – in other words, they are taking on debt, not building up credit. That compares with a positive savings rate of around 3 per cent per year for those 35 to 44, 6 per cent for those 45 to 54, and 13 per cent for those over 55.

Rises in house prices mean most millennials are renting, and tend to spend all that they earn, rather than being able to put aside money for longer-term investments, or towards a mortgage. Few have considerable personal savings and with real interest rates at zero, any money held in a bank account is left sitting there without accumulating any return.

Indeed, for many young people, consumer assets such as computers, mobile phones and cars are the only assets of value they own outright.

Even pensions are a much weaker source of capital for millennials than they once were, as an ageing baby boomer population takes its toll on how much pension funds can afford to pay out to their contributors.

As David Blake, Professor of Pension Economics at Cass Business School, City University, puts it:

Millennials now face a pensions triple whammy. Companies will have to divert resources away from productivity-enhancing investment programmes – which would otherwise increase millennial’s real pay – to cover deficits in defined benefit  pension schemes (providing a specified monthly payment to retirees)  left by older generations.

In comparison, they will have smaller defined contribution pension schemes (built up through one’s own contributions) with much less generous employer contributions. And it also looks like the real returns generated by those defined contribution schemes will be much lower and more volatile in future, giving them much smaller pensions when they reach retirement.

Despite the introduction of pension auto-enrolment, 39 per cent of young people aged 21-29 still have no pension provision at all, according to the Intergenerational Foundation.

Beyond the obvious differences in terms of wealth and future income, this capital inequality also prevents young people from being able to make their mark on the world around them.

Just as political parties listen to their voters, companies listen to their shareholders, and pension funds listen to their investors. They have to, or else their managers will rapidly find themselves out of a job.

As capital inequality grows, the interests followed by these shareholders are going to be predominantly those of the older generations. To take but one example, no pension fund is going to stop investing in BAE Systems, or in Saudi Arabian oil, because millennials are kicking up a fuss over human rights or the arms trade.

So yes, capital inequality still matters today – but it is intergenerational, not inter-class, disparities that will pose the biggest policy challenges for future governments. Not least since they will need to work out how to ensure millennials avoid becoming a burden on the state in old age as a result of their diminishing capital assets – which will be further drained by the cost of supporting elder generations through their ever longer and costlier dotage.

To solve this, we need some innovative thinking. But with unfunded public pension liabilities in the trillions, and with millennials lacking the savings, houses or pensions of previous generations, it’s hard to see how this capital gap can ever be plugged.

George Greenwood is a freelance political journalist.