Why Britain’s savings crisis is worse than you think
We all knew Britain had a long-term savings crisis, but it’s now looking more like a disaster. For all the effort the government has put into liberalizing the pensions system, boosting personal responsibility by giving everyone the choice of what to do with their pots at retirement, one simple fact has not been addressed: we’re not only not saving enough, but insufficient savings are a catastrophe in the making.
By 2050, according to Deloitte, the retirement savings gap – the difference between what people will save and what they will need to save to enjoy a reasonable standard of living in retirement – will be an enormous £350bn, an increase of nearly £32bn on similar estimates just five years ago. Even accounting for auto-enrolment and a rising state retirement age, unless we’re willing to liquidate assets like our homes or work until we drop, we will have to put away an extra £10,000 on average every year to avoid a miserable old age, which frankly even for higher-earners may prove next to impossible.
This is of course the flipside of remarkable increases in life expectancy over the past 50 years. Not only will the government struggle to maintain current generous levels of state pension payments (some in the industry say people in their 20s should be told not to expect a state pension at all), but we’re spending longer in retirement (and therefore need more money) and the cost of retirement income has risen. Last year, BlackRock calculated that, for a 70-year old male to buy £1 of retirement income via an annuity, he would need savings of £12, up from just £6 in 1971.
Tony Stenning, head of UK retail at BlackRock, says that if we don’t do anything, “by 2035, we’re going to have a generation retiring worse off than the previous one” for the first time in living memory, with potentially chilling implications for social cohesion.
So what is the solution? Most obviously, we need a fundamental change in cultural attitudes towards money, with people embracing deferred gratification instead of ramping up debt for enjoyment now. But some argue that compulsory saving, like the system in Australia – where employees are mandated to put aside a proportion of their income into a pension fund – may soon be unavoidable.
Is there a good case for compulsion? Stenning argues yes – if the government, regulators, and industry are not able to come together to agree a new, more consumer-friendly settlement for pensions. He fears that, when auto-enrolment contribution rates rise from 0.8 per cent to 4 per cent in 2018 (auto-enrolment is not compulsory, but people are opted-in by default), the high participation rates we have seen thus far will fall precipitously.
And in any case, people should be saving 12 to 15 per cent of their salary to achieve an income in retirement similar to what they enjoyed in work, he says.
Others aren’t so sure. Philip Booth, professor at St Mary’s Twickenham and a pensions expert, argues that since you can provide for retirement in many ways, and since the current state pension is well above subsistence levels, the government should not mandate one way to provide for extra retirement income over another. If the state pension were cut significantly, however, perhaps there would be a case for a mandatory “top up”, he says.
Whatever your view (and personally I think compulsory saving is inconsistent with the trend towards greater personal responsibility in pensions), this is a crisis we must face up to on an individual level, as much as on a government one.