Savers stand to inherit the earth

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The Independent Online
RELAX: this column is almost a Budget-free zone, as there will be quite enough stuff on the Budget later this week to satisfy even the most ardent enthusiasts. Instead, this chronicles a seismic change taking place in the way we run our personal finances - one that has hardly started but will become a powerful social force affecting the national finances in ways that future Chancellors will have to account for.

That change, put simply, is in the level and pattern of personal savings. We are becoming - and will become to a much greater extent - a nation of savers.

Some figures: the personal sector savings ratio (the proportion of income we save) was only about 4-6 per cent in the late1950s, but between then and the beginning of the 1980s it rose pretty steadily to reach nearly 14 per cent. Then, as the graph shows, there was a great roller-coaster in the Thatcher years, with savings plunging in the late 1980s boom (and fuelling that boom) before recovering, but not quite to its previous peak.

One obvious question is whether there was some sort of long-term upward trend that was interrupted during the 1980s as a result of rising house prices. Perhaps "the feel-good factor" in the property market was so good, we not only stopped saving but binged on borrowing, too. But in the harsh and insecure 1990s, we are again rediscovering thrift.

Certainly we have, since the early 1970s, been piling up financial assets - in particular building society deposits, investment and unit trust holdings, and money in pension funds - as the second graph shows. That in itself does not prove we will go on doing so, but there are several powerful reasons to suspect we will indeed save a lot more in the next 10 to 20 years than in the past. A recent research paper by broker Merrill Lynch examines the arguments and suggests that savings will rise.

The first is demography. Most people are aware of the rise in the proportion of the population of retirement age since the Second World War, a rise that reaches a plateau in the early years of the next century, before climbing again. Fewer people are aware of the bulge in those aged between 30 and 60, the peak earning period for most people. These rise from under 38 per cent of the population in 1991 to nearly 42 per cent in 2001. People save most in their middle years. As these baby-boomers reach their peak earnings, they will push up total national savings.

They will have to do so partly because of the low level of state pensions - the second reason for expecting saving to come back into fashion. State pensions are pegged to prices, not earnings. A basic standard of living may thus be guaranteed, but as earnings rise, the gap between the final wage of someone just before retirement and the state pension will grow.

Of course, it is possible that a future government will lift the state pension sharply: older voters would delight in that. But anyone in their 30s or 40s relying on a state pension is betting on the political colour of the government a generation from now. That is a hairy gamble, given rising pressures on public finan- ces. Prudence sug- gests that people should, if possible, build a private pension provision.

Third, there is what Merrill Lynch calls "income uncertainty". The more the uncertainty, the greater the need to save. That does not necessarily need any overall rise in unemployment: more fluid employment patterns, with less steady jobs interspersed with periods of retrain- ing and self- employment, are sufficient argument for having as large a nest-egg as possible. Income risks have risen sharply since the 1960s, and it is hard to see that trend reversing, at least in the near future.

There are two further factors: taxation and the availability of credit. At the moment, we give enormous tax advantages to contractual savings, most obviously through a pension plan, and only limited tax advantages for voluntary, personal savings. It is tough to see the overall tax incentives being cut back, rather the reverse, and some rebalancing may start to favour individual saving.

As for credit, one of the main reasons for the decline in net savings during the late 1980s was the rise in borrowing. The issue is whether that was a one-off reaction to easier credit, whether people able to borrow through credit cards rather than the time-honoured visit to a bank manager, went a bit mad. Or whether there has been an underlying rise in the willingness to borrow. Anecdotally, it seems to be more the former, for while consumer borrowing has continued to grow, there is certainly greater resistance to taking on "big ticket" debt, particularly for home purchase.

Put all these together and it is certainly reasonable to expect a rise in saving, with huge knock-on effects on banks, building societies, life assurance companies and the like. They will have to create more products for savers, not for borrowers, reversing much of the post-war trend. More interesting, however, are the implications for society and politics.

For example, we are moving into a world where willingness to save while young has become an enormous determinant of prosperity in later life. This is very much the opposite of the situation 10 or more years ago when willingness to borrow, particularly for house purchase, was the determining factor.

I suspect the willingness to save will become as important as choosing a high-earning career, given that high earnings often go with high insecurity of employment.

If that is right, there is a new and potentially troubling social division, between people who, by their background and environment, are conditioned to save and those who are not. Maybe on a long historical view that is not so new - we are back to Mr Micawber - but it is certainly different from the 1960s, 1970s and even the early 1980s.

Another social consequence will to be reinforce savers' political clout. British savers, unlike those in Germany, still do not have much - witness the way falls in interest rates are welcomed even though they cut savers' income. Expect that lobby to grow and change the nature of debate. Expect, too, greater political pressure for low inflation. And expect similar pressure for tax breaks to encourage saving: if that is what people want to do, it is nice to have a bit of help from the authorities.

The greater the incentives, the larger the savings and the stronger the lobby - the process becomes self-reinforcing. We will see subsequent Chancellors hunting for new, juicy schemes to appeal to savers, just as a generation ago they offered the likes of mortgage interest relief for borrowers. Virtue used to be to borrow to buy a house. In the future, virtue will be to save for your old age.

Most important of all, this force will cut across conventional political boundaries. The right will favour savers for their traditional characteristics of self-reliance and responsibility. The new left will favour them for the same reasons, while the old left will also be supportive, because only by increasing savings can the investment and higher public spending it desires be funded.

Do not necessarily expect great incentives for savers on Tuesday; but wait a year or two and they will come.