The Resolution Foundation published a report this morning which suggests that at least 30% of UK households have savings of less than £1,000 and are, therefore, unable to manage many of the cash-flow risks that are a normal part of life as a consequence of unexpected events. Unsurprisingly, many of these households are also those that suffer from low income.
The summary of the report's findings is as follows:
- As many as 1-in-3 (30 per cent) of working-age adults live in families with savings below £1,000, leaving them financially vulnerable and ill-equipped to respond to small cashflow shocks.
- Larger precautionary savings balances would help people cope with bigger shocks, but the country's savings shortfall is significant. If every working-age family in Britain had at least three months' income in precautionary savings, aggregate savings would be £74 billion higher.
- Saving for retirement is also too low. 39 per cent of individuals aged 22 to the State Pension age (equivalent to 13 million people) were undersaving for retirement when measured against target replacement rates of at least two third of pre-retirement income.
- Policies to boost precautionary saving have largely involve fiscal incentives, such as tax breaks or bonuses based on account balances. These policies are expensive, exceeding £8 billion in 2023-24, and are inefficient as they disproportionately benefit wealthier households.
- Pension auto-enrolment has transformed pension saving. Since the introduction of auto-enrolment, the proportion of employees with a pension climbed from 47 per cent in 2012 to 79 per cent in 2021 – an extraordinary policy achievement.
- Precautionary and pension saving are in tension. Evidence indicates that when default auto-enrolment contribution rates were increased from 2 per cent to 8 per cent between 2018 and 2019, for every £1 reduction in take-home pay due to higher pension contributions, employees reduced their consumption by 34p, with the rest of the contribution funded through either lower liquid saving or higher debt.
- Other countries alleviate the tension between precautionary and pension saving by allowing early access to pension savings under a variety of conditions so that they can also act as a precautionary savings vehicle. This offers insights into how the UK's savings policy could evolve to help boost retirement saving while also making British families more financially resilient in the short term.
I deliberately reproduced these findings to make clear that I have not missed the point of the report.
I have also checked with care what the report recommends. There are three such recommendations if I interpret them correctly.
The first is to increase mandatory pension saving in the UK over time from 8% of earnings, as it is at present, to 12% of earnings over time, with this applying to all people from age 18 without a lower earnings limit. It appears that the Resolution Foundation does not understand the potential aggravation that this will create, particularly for those with multiple employments and employer pension arrangements.
More realistically, and I think quite appropriately, it suggests that pension contributions should, in the first instance, be paid into what it calls a sidecar account linked to a person's pension savings. £1,000 would be held in this sidecar account for a person to call upon whenever the need might arise. There would be some limited barriers to access to prevent the funds from being considered to be readily available, but the whole purpose of this account would be to add a degree of financial resilience to the affairs of those making pension contributions to help address the current shortfall in savings. I see merit in that.
The third recommendation is to allow loans from a pension fund against the security of the remaining part of that person's fund, which is a commonly available facility in many countries including, for example, the USA and New Zealand. Evidence suggests that repayment rates are very good. Conditionality would apply, including requiring proof that exceptional circumstances existed. What this arrangement does make clear is that the pension is not something sacrosanct, as it is treated in the UK, but is instead just a part of overall saving. Again, I see merit in n this suggestion, which I think is better than permitting excessive early pension drawdown.
However, all this being said, the glaringly obvious problem within the Resolution Foundation proposal is that the entire onus of responsibility for solving the supposed £74 billion pension saving deficit that exists is placed upon the 30% of lower-income households who suffer that shortfall. To reinforce this, the state is given a pretty draconian stick to ensure that they comply with their obligation to create the funds in question. Staggeringly, at no point does the report suggest that redistribution might be a solution to this problem. This is despite the fact that according to the ONS, in 2021 the UK had £8,300 billion of financial wealth. That is a sum more than 100 times bigger than that which Resolution Foundation is concerned with creating for the sake of 30% of the UK population, but despite that fact, the words taxation and redistribution never appear in a meaningful way in the report (I checked).
I find this omission quite staggering. The problem inherent in the UK's obviously inappropriate patterns of saving is not that 30% of the population are somehow delinquent as evidenced by their failure to save, which is the fundamental underlying assumption of this report from the Resolution Foundation. They are, instead, unable to save because they simply do not have sufficient income to let them do so at a level that provides them with either short or long-term financial security. In contrast, as is apparent from the data, at least some within the remainder of the UK's population are able to save the considerable sums likely to be way in excess of their needs, which we know is certainly the case for a very relatively small percentage of people at the top of the wealth distribution.
My purpose in writing the Taxing Wealth Report 2024 has been to suggest:
a) The capacity to tackle inequality by imposing additional taxes on those with income and wealth does exist.
b) Imposing those taxes does not require the creation of new and decidedly complicated wealth taxes, for which the gestation period would be long and disputatious. Instead, it lies in the much more appropriate taxation of existing, identifiable, measurable, and inherently assessable forms of income and gains, all of which could be subject to additional taxation if desired with relative ease.
c) The sums that could be collected as a result are material. They easily exceed the amounts required for investment in infrastructure in the UK present, given the physical constraints on our capacity to actually use such funding. They do, therefore, provide a real opportunity for redistribution of both income and wealth, which is very obviously what we actually require.
So, why didn't the Resolution Foundation talk about redistribution as a mechanism for tackling the problem that is identified? Why did it, instead, suggest that those without savings solve this problem themselves when their capacity to do so is clearly very constrained by existing power structures on reward distribution within society? I wish I knew the answer to that because what they have come up with looks very like an extraordinarily neoliberal solution to a problem to which neoliberalism has no answers.
As it is, the Resolution Foundation has identified a problem. They have also identified some useful potential reforms within the pension system, but they have failed to identify a systemic solution to a problem created by poverty that is impacting at least 30% of the population, which was always there, staring them in the face, if only they looked at data on wealth distribution and realised that skewed distribution is, in itself the problem that they need to address. That is what is hard to understand.
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Could it be something to do with David WIllets being their chairman?
Is there some kind of omerta on them exploring wealth/income redistribution?
Willetts’ interest in ‘inequality’ seems to be confined to demographics – young vs old, with a hint of promoting division. He worked cloely with Thatcher, Nigel Lawson, Social Market Foundation….
Never understood why they appointed Willetts or why he took it on.
Giving people the right vehicles to save in is important.
At the risk of stating the obvious, the first way to allow people to accumulate precautionary savings is to pay them more. Low pay is at the heart of so many problems.
Second, increasing pension savings for people is all well and good – but what about those that do not do paid work? There is no substitute for a State Pension that is pitched at a level linked to a Living Wage. Do this and a huge chunk of people
can probably forget about the need to save for a pension.
Third, pension tax breaks do distort behaviour in both good and bad ways and I do think we can do a better job. On this front I am tempted to get rid of all tax incentives and do things differently.
If we follow your recommendations in the Wealth report and equalise tax rates on earned and unearned income (and we should) then it would make no sense for most people to save in a Pension vehicle because pension saving is merely “tax delayed”; the only reason to use it is if the tax rate on “money out” is lower than “money forgone”. So, for basic rate tax payers there would be no incentive to use any savings vehicle (other than an ISA) – and higher rate tax payers should not be subsidised anyway.
It would also allow a more holistic approach to individual finances. Does it make sense to have a huge mortgage debt on which I pay 5% interest whilst saving in a separate pension vehicle that is growing at 4%? No – savers are “paying away the spread” (no prizes for guessing who receives this spread – the City). Their money might be better employed in paying down their mortgage and sensible behaviour is being distorted by tax incentives.
Doing away with tax incentives eliminates many of the problems of balancing long-term and precautionary savings. If savings for old age are to be incentivised why not through an NS&I account that just pays decent rates (Base rate or a “blended gilt yield” rate) with modest penalties for withdrawal?
There is lots to think about with savings – but the starting point has to be higher wages at the bottom of the scale and a “Living State Pension”.
I think there is a whole Report in there…..
Clive, if I may opine; that is one of your best interventions. There is a limpid, elegant simplicity to the form in which you present the proposition. It hangs together, in practical terms, it ‘cuts through’ because it is persuasive and can be easily understood by a wide public.
There is a rich harvest of communicable ideas to be developed from the simple foundation you provided. I like the simplicity. The rentiers love complexity; because that is how their system works; the complexity is presented as the wisdom of the City, to ensure the ‘spread’ is entirely in their hands; in short the public is routinely playing the ‘three card trick’ with hustlers who use them as ‘the mark’. You offer the public a better alternative, played in slow-motion; so they can see what is happening.
As I said, much to think about there
I might have to buy Clive lunch to explore it further. We happen to live relativbely near each other.
What Clive has also done is reveal the inherent cruelty of austerity and a bent financial system that favours rentiers.
Deliberately pauperising people always creates more misery and that includes more cost to society.
Richard,
The problem was neatly summarised by my late father ‘These people dont have any money”
Once we have addressed that problem, the first issue I might raise is that for most means tested benefits you doint get anything if you have over £16000 in savings and you lose about £4.25 per month for every £250 you have over £6000m.
The thresholds for Council Tax Support schemes are even lower.
These limits havnt changed since 1990.
I have previously suggested that there should be some sort of ‘Citizens Savings’ similar to Help to Save but open to all, one account per person with anyone on means tested benefits or possibly Child Benefit getting their contributions paid for them.
Then there is the pension issue, yes more people have them BUT what will they be worth on retirement? You suggested abolishing Pension Tax Relief that would allow the basic state pension to be increased by £5000pa
I have also suggested that before any private pension can be taken out there should be a national ‘additional’ pension, for want of anything else I proposed a figure – index linked of £3500pa using the rate for purchase of extra pension from the Local Govt & NHS Schemes of £14000 per £1000, I would also suggest that Carers & anyone with children under 11 should be credited with 1/35th (£100pa) of the amount each year
We need a State Earnings Related Pension scheme. Thatcher got rid of it.
Thank you, Richard.
Not just rid of it, but encouraged people to contract out of SERPS by investing with private sector vultures.
Speaking of misselling, the bank that missold the most PPI is rumoured to be making provisions for PCP.
You couldn’t make it up
“We need a State Earnings Related Pension scheme. Thatcher got rid of it.”
Your memory is fading Richard. SERPS was introduced in April 1978 (this was before Mrs Thatcher became Prime Minister). It was replaced by the State Second Pension in April 2002 (this was after Mrs Thatcher was Prime Minister). Hard to argue that she ‘got rid’ of something that was still in existence 10 years after she left office.
It was gutted from 1988
I have proposed this idea in this blog before. The government should offer “Forward starting, index linked annuities” – people should be able to buy (for an upfront cash payment today) an income stream starting at 67 until death. The question is what should be the cost? My suggestion is just construct a theoretical price from Index linked gilts and mortality tables (a simple job) and have the government sell at this price. In effect, it will replace some gilt issuance and could easily become part of the overall debt portfolio of government.
SERPS? If I recall correctly (and I may not) it did involve a degree of redistribution as high earners paid more with a cap on pension entitlement; also the amount actually paid only bore a fairly loose connection to the market value of the benefits gained.
My preference is to separate completely a state pension funded from general taxation (with some eligibility/contributory requirements) and “top ups” that should not involve any cross subsidy and should happen at a market price… albeit delivered by government.
Again, to think about.
‘Auto-redistribution’ of the higher rates of tax relief on pensions contributions might be a good place to start. Although I suspect that could result in a drop in pensions contributions by higher earner…..
https://www.taxresearch.org.uk/Blog/2023/09/06/ending-higher-rates-of-tax-relief-on-pension-contributions-would-raise-14-5-billion-in-tax-a-year/
Of course the government wants “poor people” to have a small workplace pension.
It saves them a lot of money.
Because you are then ineligible for Pension Credit (aka the Gateway benefit because it entitles you to many other means-tested benefits eg free dental care).
Many people are already caught by this.
Going forward, many more will be.
Agreed
This situation is absurd
Thank you, both.
I’m equally mystified. Perhaps, they were impressed by his Whitehall nickname, “two brains”.
Torsten Bell is no better.
I have only met him a couple of times
I admit my only recollection is of supreme self-confidence
While not directly comparable this is a slightly better picture today than it was 8 years ago.
https://www.bbc.co.uk/news/business-37504449
Why oh why do think tanks so rarely provide consistent surveys across the decades and across countries? Where the grants come from I suppose. No-one is going to fund an NGO to provide a snapshot survey of any aspect of life in a consistent way once a year over 20 years.
Thanks
In other words, there really was not a lot for the Resolution Foundation to find.
Well, having seen my latest water bill for the year and compared notes with colleagues, friends and family I can only concur with your view about wages but it also must be said that we are also seeing some extraordinary pricing coming in for services – a colleague of mine who lives on his won has a water meter and his bill was bigger than mine!
It’s not just wage exploitation but also price exploitation on this damned island that we have to contend with.
Price exploitation indeed. Four years ago pre Covid, our cat was in for vet treatment and totalled £150. In the last couple of months she needed treatment again and a similar examination, tests and treatment have set us back close on £700. We have had to claim this time on insurance but premiums next year will at least double as a result. This can’t “only” be inflation surely.
A tiny typo: “Revolution Foundation” in penultimate para.
Thanks
Not bad given that I started that before 6 this morning.
Yes and yes are the answers to your questions Andrew.
Put the blame on the ‘feckless’ poor, not the ever increasing inequality Willets and his fellow travellers have produced for decades.
Am I right in believing that the “30% with less than £1k” is going to get worse?
If the government fails to currently spend adequately for the current needs of the private sector, isn’t the difference being made up by the draw-down of private savings (sectoral balances sum to zero?) Savings, and the use of credit that reduces the ability to save further, of course.
If I’m right, that to me is more of an immediate concern than *how* the private sector saves.
That’s not to dismiss the *how*, but the politicos talk of “growing the economy… while selling the seedcorn needed before the harvest.
Just a couple of months ago the Resolution Foundation published a paper arguing that the government should run a budget surplus more often than not. Taking that alongside this current pronouncement demonstrates the utter cognitive dissonance (if we are being charitable) / the mendacious stupidity (if we are being honest) of mainstream macro-economics and their hanger on think tanks like the Resolution Foundation and the IFS.
As Anne points out the Sectoral Balances do not lie. If the domestic non-government sector are to be in surplus (a pre requisite for people to increase their savings) at least one and likely both the foreign sector and the government sector must be in deficit (as it all nets to zero). As I dont see the UK running a trade surplus anytime soon then the only place those savings can come from is a government deficit. And whilst a good dose of old fashioned redistribution via the tax system would not go amiss it would certainly not be sufficient to provide the much needed investment in public services at the same time as increasing the incomes of the lower paid.
And that is before we turn our gaze to the Bank of England which is currently hell bent on causing a recession based on a totally irrational fear of people who have seen their incomes lag inflation for over 15 years now receiving any kind of an above inflation pay rise and using the totally unsuitable policy of interest rate rises to acheive this. It is also clear that most of those with no savings also likely have high levels of personal debt (including mortgage debt) meaning those high interst rates are not encouraging saving among those who currently aren’t but causing even more financial distress for this cohort least able to financially cope.
Well spotted
I’m definitely not an economist by any stretch of the imagination, but i always thought that quantitative easing would be so much simpler and easy for everyone if it was carried out by depositing £1000 into every single personal bank account in the country (based on a list of accounts taken a month before the announcement so no one can game the system).
Hey presto, everyone has some savings or can use them to buy a new oven, a solar panel, a deposit on a car, a dog, or just blow it having a series of parties in Wetherspoons. Either way, the economic would tick along just nicely.
Any reason why that cant happen?
Yes.
It would have been utterly unfair not least in those without bank accounts.
If you can think of a simple solution in macroeconomics it’s invariably bad.
True. I suppose there must be a way of getting it to them somehow? Use a driving license/passport to collect it from the post office, maybe?
The point though, more generally, is that giving the money direct to consumers and letting them do with it as they please would surely be better than giving it to the banks 😐
Sorry – but you miss the point that the money did not just go to banks. It inflates their CBRAs, but the money was spent on delivering government services. Money can do multiple things at once.
Steve
I am sorry, but you really don’t understand. The people at the bottom of the economic tree, those who have nothing and expect less. will never have a driving licence – why would you pay for that (with money you don’t have) when there is never any possibility that you could ever take a single driving lesson? or a passport, if you cannot afford to get a bus to the job centre, where could you possibly go that would need a passport?
I’ll bow to your expertise there Richard – you are taking about things I have no idea about. I do accept that public spending is an equally valid use. But I still think that an approach which seeks to put money into the pocket of the individual directly – alongside other approaches probably – would be just as valid a way of giving the economy a boost. Though perhaps it would encourage too much spending on overpriced items?
Cyndy – that’s fair. It was only a suggestion of something that most (or perhaps many) have. What about an NHS number, everyone had y one of those, no? P.s. I’m not supportive of the need for voter ID and this isn’t intended to be a ruse…
I suppose what this does demonstrate is that there is no simple solution to anything. Which is probably why populist politics – with all its need for whizz bang announcements and never being seen to back down or admit you were wrong – is a recipe for disaster…
Steve
I have to raise issue with you. Public spending provides money for private use – always. It cannot do anaything else. Furlough was supposedly paid for with quantitative easing. That was personal spending. You really are making a big mistake onm this. You do hve to understand it. Reaad yesterday’s paper on money flows.
Richard