Claer Barrett has written a very good article on the plight of those entering the labour market having spent time at university and accumulated something in the region of £30,000 of debt. Like many in their fifties and sixties, I know about this problem.
The headline of the article refers to an increase among some in investment in anything from speculative tech stocks, to crypto currency and highly leveraged bets on markets such as Forex. Armed with the web and a first class education, many are turning away from conventional accumulation plans involving long-only liquid funds and “moving up the risk-curve”.
The fall-out for those who lose is a relatively small snake, for those who win, it could get them on the first rung of a ladder to wealth (usually seen as the housing ladder). As that ladder is currently set at an average of £57,000 (but twice that in London), it’s a big step.
The top comment on the article came from a recent Reading graduate
“Could somebody answer how on earth young people are going to buy a house AND save for retirement?”
Old enough to be enrolled, young enough to pay London rents, most graduates in their early 20s and living in London are paying well over £1000 pm for their accommodation. That’s more, even after a few interest hikes, than they’d pay on a starter level mortgage and there’s that insidious “opportunity cost of knowing that whatever the deposit limit is today, it is likely to be higher tomorrow as house prices continue to surge.
Meanwhile, hand-wringing from parents, confused about what crypto-investment is about, is making it harder for us to bridge the generation gap. I am bored with conversations amongst my peers about how gullible kids are. Young people do not need to be censured for looking for solutions, they need guidance as to the risk/reward trade offs. Sadly we are not well equipped to discuss these trade-offs.
Short of giving our kids our savings, there’s not much we have to offer than platitudes about the cost of delaying starting to save for your future. It’s seen as a self-serving message by many of the people whose comments I read on social media.
The earnings trap
As the lucky generation, boomers like me can at least try to understand what is behind the seemingly irrational choices young people are making about how to allocate their excess cash. The problem starts because that “excess cash” is often very limited.
Many graduates do not prioritise jobs with high earnings, preferring to earn lower amounts and pursue a career that matters to them. But this trade off is doubly bad for their wealth. Not only do they not get the upside of net disposable income, but they get hit with a very welcome extra income tax of 9% of everything they earn over £27,295 (the frozen threshold for repaying student loans). This makes income taxes, together with the new national insurance surcharge , make saving between the student loan threshold and the higher rate tax-threshold, super hard work.
For grads who are basic-rate taxpayers, every pound they earn above that frozen threshold from April will be taxed at 42.25 per cent (income tax of 20p, national insurance of 13.25p and a further 9p to repay the loan). (FT.com)
The irony is that hitting the upper earnings threshold now means swapping extra income tax for lower personal national insurance for higher income tax at a ratio of 1:2. What looks like a 20% hike on the top slice of earnings is only 10%, except you are now beginning to earn enough to be getting out of the earning trap. The tax system for graduates is geared to getting people above the earnings threshold asap.
Barrett, who wrote a recent article helping young people to ask for proper pay-rises, has spoken out against Andrew Bailey’s call for wage restraint and for good reason
The anger that’s met the Governor of the Bank of England’s recent call for restraint on wage settlements is being interpreted as boomers pulling up the drawbridge and denying subsequent generations a fair share of the national GDP.
Of course the most disadvantaged are those who have to cope with inflation , higher national insurance and benefit cuts. Recent graduates aren’t disadvantaged to the point of poverty, but they now face the choice of trying to bust through the earnings trap (easier said than done) or accepting lower wages and finding alternative financial plans.
Faced with these trade-offs, is it surprising that so many are interested in speculative investment? While they wait for their parents to pass on familial wealth, what else can they do?
Is it surprising that our children are paying Vitalik Buterin more regard than Andrew Bailey?