Sunday, 29 June 2008

No savings today, an army of poor pensioners in 10 years

It is the complacency that I can't abide. Hardly anyone saves anymore. The spirit of the age is to spend everything that is earned; if that is not enough, then borrow, and above all, let the future take care of itself.

Where did this complacency originate? For some, there is a belief that accumulated home equity will suffice. When old age finally comes knocking, living standards will be protected by a quick downsize from the three bedroom semi to a two bedroom apartment. Others suffer from a more deluded idea; the state pension will be enough.

We will deal with the state pension in later posts. Suffice to say, we will dispose of any optimism about the value of pension in 10 years time.

Today, we will look at savings. Last week, the ONS published the savings rate for the first quarter of 2008. Only one percent of income generated in the first three months of this year ended up as savings. We spent the rest.

The first chart below illustrates total income by five income groups; starting with the lowest 20 percent and rising to the highest 20 percent of earners. It breaks income down into three categories; earned income (i.e. wages), benefits, and investment income. The data covers all households, including those who have already retired.

Investment income (the purple area in the chart) is the key number. As you can see, it only makes up a small component of total income. For the wealthier households it is a little higher, for the lower income groups it is lower. This investment income covers private pensions as well as regular investment income on shares, bonds and bank accounts.

For each of the five quintiles, the chart presents only averages. In each group, retirees will not typically receive any earnings. Instead, their income will derive from benefits as well as investment income.

The key point is that investment income is surprisingly low across all income categories. Moreover, the average disguises huge variations. A few people have a lot of savings; most have very little.

At this stage, you might ask "how do you know that most people save very little while others have a lot?"

Here we come to the shocker. According to the most recent family resources survey, 79 percent of households have savings less than ₤10,000, 56 percent of households have less that ₤1,500, and around a third have absolutely no savings at all. This sorry tale is illustrated in the chart below.

To put these numbers in context; average household income is about ₤30,000 a year. This means that 80 percent of the population have less than 4 months of average income saved up, while half the population have less than two weeks.

When people do get around to saving, why do they save? When asked, about 40 percent of people say they save for emergencies; while a slightly lower number say they are saving for some housing related reason. About 36 percent are saving for consumption related reasons; a holiday or a "special" occasion. Only 30 percent say they are saving for retirement.

Within about 10 years, 20 percent of the UK population will be over 65. The vast majority of these future retirees are depending on two things; a house sale and a generous state pension. Neither of these two things are likely to materialize.

The UK economy is facing many problems right now, but perhaps the biggest one is a massive explosion in old-age poverty. Within 10 years, the UK will be overflowing with grey haired penniless retirees, who have put nothing away for their old age.

Finally, everyone who reads this post should ask themselves a couple of simple questions; how much have I saved? How much do I expect to have by the time I retire? Have I diversified my investments? Am I depending on the sale of my house to carry me through retirement? If the answers to these questions are nothing, very little, no and yes, then you are in big trouble, and don't say you weren't warned.


Anonymous said...




Anonymous said...

Alice: "Where did this complacency originate?"

It is the rational response to the welfare state. "You will be looked after from cradle to grave", a lie of course, as old age pensioners are finding out already.

Secondly, as the government has an appetite for inflation, and we know they have - what rational individual would save money only to have its value destroyed by government policy.

What is the point of scrimping and saving to put a little aside 'for a rainy day' when the government will eradicate the value of your savings?

People, no matter what low opinion you may have of them en mass, will make the most basic evaluation of their own best interests.

In an inflationary environment, you had better spend the cash while it is worth something, because tomorrow, it will be worth less.

By the way, if you borrow today to buy something you otherwise might have had to save for, even better because your debt is devalued by inflation too.

Mark Wadsworth said...

"investment income is surprisingly low"

Why is that surprising? The notion that greedy corporations rob huge swathes of the country to serve their shareholders is quite simply untrue. Total 'investment income' is only 10% of GDP or something.

Further, he said, warming to his theme, this shows up the idea that "everybody can have a decent private pension" to be total nonsense. Even if all shares were owned by pension funds, the average private pension would only be in the order of £50 - £80 a week (I forget the exact figure). So offering tax breaks that allow people to build up a larger pot than this is just stupid, it is a zero sum game.

Anonymous said...

I blame family planning.

When it became widespread in the 1960s, no one considered the demographic implications. People stopped having babies and the birth rate sank.

Now, there aren't enough children today, who will be adults in 10 years time, to pay for the pensions of people like me.

I know that we have recently seen some eastern europeans arrive, who could potentially take the place of the missing generation. However, I think they will all disappear as more of the baby boomers start to retire and tax rates go up to pay for the higher pension burden. They will all feck off back to Poland.

No, we are screwed. We did a lot of screwing but not enough procreating. Now, there is no one to look after us in our dotage.

Family planning? It seemed such a good idea at the time.

Anonymous said...

Anon @16:54 "Now, there is no one to look after us in our dotage."

This comment reminds me of a question time some while back, the discussion was pensions and the demographic 'timebomb', one of the repulsives Beeb 'plants' in the audience, "We need immigrants to pay for our pensions!" So many thoughts crossed my mind, but I guess the prominent one was "you have a fat chance, love!"

"We did a lot of screwing but not enough procreating."

Actually not true, in actual fact, if it wasn't for the '67 abortion act the population would be, by some estimates between 5 and 7 million higher.

So plenty of procreation, just for some inexplicable reason the nation has taken a collective decision to commit suicide.

Anonymous said...

i've just figured out that i am in the bottom bit of all three charts

electro-kevin said...
This comment has been removed by the author.
electro-kevin said...

I agree with anon at 16.22

A very gloomy blog but important nonetheless.

People don't have much choice really.

I'm saving for a pension but even then don't expect to see much of it when I retire. I often wonder if it's worth the huge sacrifices of today just to have it robbed off me tomorrow. To end up sharing a dormatory with a welfare assisted geriatric who p****d it all up a wall while my house is sold off to pay for my care and subidise theirs.

Nu Lab have put in place all the disincentives for saving and planning for tomorrow.

It's not fair to blame the people for living for today - it's the only form of self determination they have now and they're absolutely right to blow it else they end up bitter for not spending it when they could have done before socialist redistribution kicks them in the teeth.

Anonymous said...

To put it another way, there will be no recovery in the housing market for structural reasons.

Anonymous said...

The flip side to abortion is euthanasia so you can expect to be given a place in the government gas ovens when you are no longer capable of work.

If people can murder innocent babies without a qualm what makes you think they will show people past their sell by date any mercy.

Anonymous said...


The scariest thing is these pensioners have a vote and they will use it to steal our money.

Do you want 80% of your salary stolen to keep them happy, knowing they spent their last 30 years wrecking the country for you?


Anonymous said...

Nick: "Do you want 80% of your salary stolen to keep them happy,"

Cor! didn't think of it from that perspective.

Nick: "knowing they spent their last 30 years wrecking the country for you?"

We will be able to identify the folk who destroyed the country, they will be the ones on indexed tax funded pensions living in walled compounds. You know, top civil servants and MP's.

I still have an appointment with Edward Heath after a couple of pints one evening.

sobers said...

Unfortunately the effect of means tested benefits is now being seen. If you are on a low to medium income, what is the point of saving for your retirement? Any income you get from investments/private pensions will disqualify you from any higher govt pension/benefits. So you might as well spend all your money now and be on benefits later, rather than scrimping and saving all your life, only to end up with about the same income as the person who blew it all and lives on the taxpayer. It's a rational response to the current setup.

I'm beginning to come round to the universal income policy - everyone gets a similar amount of money from the state and that's it. No benefits or pensions. You pay for all your expenses out of your universal income plus whatever you make as income, or have from savings. Reduce the size of the welfare state to virtually zero. It would probably cost more to start with, but the long term benefits, both economically and socially would be massive.

dearieme said...

By the time that Equitable Life and Gordon Brown had finished with my personal pensions, they didn't seem all that good an idea.

electro-kevin said...

We live in a socialist state in all but name.

This is why people are stultified.

The statist response to everything from crime to education to pensions is that all ills are caused through inequality - that any failings are the fault of productive people being too successful and that their earnings must be redistributed to put things right.

There is only one word that I have for anyone with the talent and the wherewithall (coined by Hatfield Girl)


You'll feel much MUCH better for it, Alice.

powerman said...

For people with a mortgage, paying off the mortgage as fast as possible rather than saving cash makes more sense.

You get taxed on savings interest, and should you find yourself unemployed, you'll be forced to spend savings until you're down to about 8k. You won't be forced to spend your housing equity though.

aSteve said...

I've met people who actively rush to spend any excess cash they accumulate on cars/holidays so as to ensure that they will qualify for state handouts if they suffer an unexpected blow to their circumstances. They're quite rational.

I also think that the idea of downsizing can still work for those who only have housing equity. For example, I'd pay £200K for a nice 4-bed detached house... (they ask £400-600K today) - and, if this lump sum is ploughed into an annuity for someone aged 65, this amounts to £15-20K as an annual payment for the rest of their life. This, I think, is plenty for an adequate independent lifestyle - all be it one devoid of extravagant luxury.

Of course, not everyone will have a home they value at half-a-million-ish today... but the strategy can work for some.

Anonymous said...

"They're quite rational"

But extremely vulnerable. It's like putting out your eyes so you can become a more effective beggar.


sobers said...

Electro-Kevin: While watching the Adelaide Ashes Test match in 2006 (for my sins - the most depressed I've ever been when we lost!) I read Atlas Shrugged by Ayn Rand. If you haven't read it, do so. It's an accurate precis of where we are as a society now, and where we are going. It was written over 50 years ago, but many of the themes fit our situations to a T. If you agree with it (and me) the future is not good......

Anonymous said...


Just don't go off and become one of those Rand cultists. Look what it did to Greenspan.

Oh, and play the Xbox360 game Bioshock for a nice satire of what would happen if the Randists got to run a country.

But yeah, the book is food for thought.


Markbaldy said...

In Gordon Brown's UK you have to come in one of two categories... 1).Have a couple of million quid stashed away and live well... or 2).Have sweet nothing and get state handouts.
Anywhere in between and you are simply wasting your time - after you have paid to get to work, paid tax on your earnings, paid the mortgage, energy bills, ever higher food bills, taxed your car, 1 week package holiday to Benidorm... your average "hard working family" is only getting older but not wealthier... retirement is not an option.

aSteve said...

Nick: "But extremely vulnerable. It's like putting out your eyes so you can become a more effective beggar."

If these people are sure that they will become beggars, this might also be a great example of rational behaviour. I wonder how many people in the UK have intentionally compounded injuries, for example, in order to continue to receive incapacity benefits?

Just because these acts leave you feeling sick does not mean that they can't be the best available option for some, if not the majority.

Anonymous said...


Perhaps but it's extremely bad risk management because the momeny the benefit ceases to cover living costs (whether cos its cut or inflated away), you are royally screwed and have no options.

Rational but not smart.


Anonymous said...

has everyone had enough having a go at pensioners?

Anonymous said...

Alot of pensioners are just chavs who got old.