The Deadline to the Breadline

The Deadline to the Breadline
June 9, 2017 Mark Richards

Savings and the deadline to the breadline

Many people in the UK have a worryingly low amount of savings. Could we ultimately move to a situation where we are forced to save for our own good?

Let me begin with a disclaimer: this article was written on Thursday afternoon, while people in the UK were still voting in the General Election. By now you will know the result and you will either be smiling with satisfaction – or be wondering how quickly you can relocate to Mexico…

We will cover the General Election result and what it is likely to mean for the coming months on Monday – once the dust has settled over the weekend. For now, let me ask you a simple question.

How long will your savings last?

According to a survey of 2,000 employees carried out by Legal & General, the average answer is 32 days – just over a month. Worryingly, 23% of people said they had no savings at all, and 26% said their savings would last just a week. So for virtually half those surveyed, the ‘deadline to the breadline’ was no more than ‘this time next week.’

“Unfortunately the UK still suffers from a savings gap,” said Richard Kateley of L&G. That appears to be something of an understatement with more than 1 in 5 people saying they had less than £500 in savings. As a bare minimum, financial advisers will normally advise clients to have three months’ wages or salary as savings.

There were some regional variations across the UK – Norther Ireland had the highest average figure at 36 days and Wales the lowest at 26 days – but whether your savings run out in 5 weeks or 3½ weeks is immaterial to most people.

“Renting your lifestyle”

Richard Kateley referred to these worryingly low levels of savings as “renting your lifestyle.” We are routinely warned ‘your home is at risk if you do not keep up repayments on your mortgage or other loan secured upon it’ – but Kateley pointed out if your savings will only last a month then everything is at risk if you lose your job.

How does the UK compare to other countries?

So where do people save the most money? The assumption would be that the richer a country is and the lower its tax rate the more its citizens will save. But we are not talking about billionaires in oil-rich states in the Middle East here; we are talking about ordinary people like you and me, saving out of income.

The American website www.247wallst.com looked at savings rates among leading economies. Tenth on the list was Austria, with people paying nearly 33% of their earnings in taxes but still saving just over 9% of their income. The Swiss – so long regarded as paragons of financial virtue – were the only 7th on the list, despite only 21.5% of their income making its way to the taxman. Sweden, Germany, Belgium, Spain and France came next but the winner, surprisingly, was Ireland, with people saving 19.3% of their income.

How does the UK compare to other countries with savings

You will notice that the UK was conspicuous by its absence. But some of the countries on the list – Spain and Ireland, for example – have been through some tough economic times. Does this mean that hard times encourage people to save? When the going gets tough the tough put some money under the mattress?

As we have written many times on this blog, the UK could well be in for some difficult times. The country faces major demographic changes: people are living longer, but not necessarily in better health. More and more people are living alone. Both these factors place a huge strain on the NHS and on social care. When you add in the medium-term threat that robotics and artificial intelligence pose to jobs, having only 4 weeks of savings may not be the best idea. Clearly, we need to save money: at some point, the proverbial ‘rainy day’ will arrive for far too many of us.

Has thrift gone out of fashion?

The traditional advice – the advice your Granny would have given you – is to save first and then spend what you have left. But for the vast majority of us that goes against human nature: we spend what we need to spend, pay the deposit on a week in Spain and if there is anything left, go out for a meal.

In addition, increasing competition in the labour market is forcing wages down. More and more people are working in the ‘gig economy’ or on zero hours contracts. Earnings are all too often unpredictable and saving – and consistent budgeting – becomes difficult if not impossible. ‘Food is going up,’ people say. ‘The kids need new shoes to go back to school; it is four years since we had a holiday.’ It is very hard to argue with that: but one country may have come up with a solution – albeit an unwelcome one…

Could the government step in and force us to save?

Singapore is often held up as one of the models the UK could follow post-Brexit. In April of this year, the Institute of Economics Affairs wrote an article comparing Singapore favourably to the UK and citing the fact that when Singapore gained its independence from Malaysia in 1965 its GDP per person was just $4,000 – roughly a quarter of that of the UK. Today it is $53,000 – 25% more than the UK’s equivalent figure of $42,000.

But it is worth quoting the opening paragraph of that article:

“We might quibble about whether or not Singapore has a small state. The government compels citizens to save 35% of their incomes to pay for healthcare and pensions. Since the money still belongs to the citizens, the state stays fiscally small. But it is big in bossiness.”

35% of their incomes? Yes, you read it right: forced savings on an epic scale for the citizens’ own good. And before you say, ‘It couldn’t happen here,’ just remember Brexit, Trump and Theresa May’s coronation. If there is one thing we should have learnt by now, it is ‘never say never.’

We will be back on Monday to look at Thursday’s election and consider whether we are now in for a ‘period of stability’ or whether we will all be at the polling stations again in October – with all the implications that could bring…

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