What this chart from the FT shows is that UK Companies and Households are spending more than they are saving. They join our Government in this.
We are not like the rest of the world that saves more than it spends. We are still in what Mervyn King calls the “policy paradox”. The paradox is that we – like the USA – are most in need of high interest rates to encourage saving but insist on low interest rates – to encourage spending.
What this means for our retirements.
Companies are spending less on our retirements, we know this because we feel this. We no longer benefit from the accrual of defined benefits, if we are lucky we get more than 5% of earnings paid into our pension pot, if we aren’t – we get offered the bare minimum – 3% of part of our earnings.
This is not good enough for a nation that is not blessed with a Scandinavian style welfare system in older age.
What this means for our retirements is that we are going backwards and backwards fast. Despite wider coverage because of auto-enrolment, we are becoming less secure of of having a wage for life. Increasingly we are turning to equity release from properties (a booming market).
Do economists agree with me?
The FT reports comments from a number of economists who are good at making simple statements from complex data
Rob Kent-Smith, head of GDP at the ONS, said last month that
“households spent more than they received for an unprecedented nine quarters in a row”.
Martin Weale of King’s College London, a former external member of the BoE’s Monetary Policy Committee, expressed concern that low rates of national savings would lead to future disappointment with living standards.
“National savings is important because if you have a situation where people want to retire, you have to ask how they can do it,”
Weale goes on to paraphrase the conclusion of the Turner report – now nearly 15 years old.
“You can save for retirement, you can hope young people will pay for your retirement, you can decide not to retire, or I suppose you could retire and starve,”
It looks like everyone’s agreed. So why aren’t things changing?
The Policy Paradox
We are addicted to low interest rates which keep lifestyles good. We do not see the point of saving when interest rates are low, despite global markets making real returns on our savings easy to get (certainly since the financial crisis).
But when we are defaulted into saving more, we save more- that is the lesson of auto-enrolment. No one yet has nudged too hard.
I suspect that we are a nation of guilty spenders in need of a financial weight watcher to get us back into shape.
For those with mortgages, our cashflow has never been so good. Now is the time to stop messing around with cash ISAs and get stuck into long term investment matching our longer term life expectancy.
For those without mortgages, the recent downturn in the housing market is a timely reminder that buying into a falling property market is like catching a falling knife. There is no substitute for regular saving out of salary or drawings.
Let’s keep it simple
- We aren’t saving enough
- We can afford to save more
- Government needs to act as it has with auto-enrolment
- You can’t nudge hard enough
- Put up the auto-enrolment minima asap.
Now for the good news!
Nearly 400 of you have already invested in AgeWage – a project led by me and bringing together a lot of committed and passionate pensions people.
You can invest in AgeWage by clicking this link