We should be worried about the UK's lack of savings

People are saving less and less, which increases the burden onto younger generations. We must lower interest rates and change social norms before it’s too late

Fewer people are buying property, meaning a smaller collective cache
Fewer people are buying property, meaning a smaller collective cache

The latest national accounts, for the first quarter of this year, show two alarming features. One is that real incomes have been falling for nine months, the longest such decline for 40 years. The other is that the savings ratio has fallen to 1.7 per cent of GDP, the lowest since the present set of records began in 1960.

Put the two together and you can see that people are maintaining their standard of living, but only by running down their savings. If you knock off the amount of money put into occupational pensions, which are of course a form of saving, household savings are actually negative.

Whenever you get a set of figures that are unusually gloomy, or unusually cheerful, you have to aim off a bit. The growth figure, only 0.2 per cent in the quarter, will probably be revised upwards, though it may take a couple of years before this happens. There are exceptional items, such as some one-off tax payments that depressed the savings rate. The impact of the fall in the pound on inflation will soon have moved through the system, bringing inflation back down and enabling incomes to grow again in real terms. As for growth this year, most forecasters expect it to be between 1.5 per cent and 2 per cent, not brilliant but not dreadful either.

But there is one number that even with these qualifications is really worrying and that is the savings ratio. Over the past 30 years the UK savings ratio has averaged around 8 per cent of GDP, that’s including the pension contributions. To go below 2 per cent is remarkable. Americans, never noted as great savers, still manage to save 5 per cent of GDP at the moment. Germans, who do have a stronger savings tradition, are saving nearly 10 per cent of GDP.

Which political party can fix our economy?

This matters for a host of reasons. For a start, if people don’t save enough for their retirement, then the burden shifts onto the state, or more precisely onto the present generation of working people who pay the bulk of the taxes. This creates social tension. You can see the resentment now among the young that they have to pay the pensions of the retired. But equally retired people who have paid tax all their lives feel that they have earned those pensions and deserve to get them now.

But this is not just an intergenerational thing. It is also an interpersonal thing. It depends a bit on how you calculate the numbers but roughly one third of the people in the UK have savings of less than one month’s income. That includes the old who have tended to save more. If you take people of working age it is worse, with about 40 per cent of them having less than £100 of savings – in effect virtually nothing. More than half the 30 million people who use credit cards cannot pay off the balance at the end of the month.

The tension between people with savings and those without will get worse. That is because until 10 years ago the proportion of people who owned their own homes was still rising. Now it is falling. Buying a home is a form of forced saving. Unless you have an interest-only mortgage part of the monthly mortgage bill is paying off the principal of the loan. Anyone who rents, now a majority of young people, is not forced to save in this way.

So what’s to be done?

For a start it would be helpful to have a return to normal interest rates. If you had to devise a policy that would deter people from saving and encouraging them to borrow, you would say: “Right, we are going to keep the interest on savings below the rate of inflation and we are going to keep borrowing rates for homes down to 3 per cent or so.”

That is the lure the authorities have given them, and surprise, surprise, people have taken the bait.

Next, and this is happening, we have to get everyone into a personal pension. That is what the new system of auto-enrolment is about. Unfortunately the UK occupational pension system, 20 years ago the envy of the world, has been undermined by three things. One was the raid on pension dividends by Gordon Brown back in the 1990s. A second has been the chopping and changing of the rules under which people can set aside part of their income for a pension. And the third are the supposed “prudential” rules that require, or at least encourage, pension funds to put money into low-yielding government securities rather than higher-yielding equities.

The key change needed is to get people to accept that it is too risky to expect that a government in 30, 40 or more years’ time will be able to pay decent pensions. Once you accept that politics are inherently unpredictable you recognise that you have to take action yourself.

That leads to a final point. What has happened to the culture of saving? Has it simply become too easy to spend? Credit cards surely increased the incentive to spend. Have contactless debit cards now made spending easier still? Why do Germans save and Britons not? I don’t know the answers to any of these questions but I am troubled by the idea that a country that does not save is a country that is taking risks with its future.

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