17 December 2013
- IFS study is a wake-up call to embrace benefits of saving and working longer
- Headlines of younger generations being much worse off than previous generations are too negative
- IFS shows younger cohorts were much better off earlier in their lives but spent rather than saved – as economy picks up they can rethink their lives
IFS report shows lower incomes for younger generations partly result from failure to save: Today’s IFS report has led to dire warnings that today’s middle aged groups are heading for a poorer retirement than current older citizens. However, the headlines fail to reflect that much of the reason for this is due to lower savings rates. Younger generations have saved less and borrowed more than those in or just reaching retirement. Money spent today will not be there to live on tomorrow, so it should not come as a surprise that their future income and wealth prospects are lower than those who saved more.
Despite higher incomes than previous generations: Indeed, the report’s findings are even more damning, since they show that those now around their forties actually had much larger incomes than previous generations from which to set aside savings in their early adult years, but they chose not to. Savings rates declined significantly from the late 1990s as the 1960s and 1970s cohorts failed to take advantage of years of rising income. By contrast, older generations were more inclined to put money away for the future and avoid too much debt, rather than just live for now.
Earnings growth will recover and today’s forty-somethings have time to improve their position: Another reason for the failure of middle-aged incomes to keep up with those of people near or newly retiring is the lack of earnings growth in the economy in the past ten years. Obviously, periods of economic recession (following the 2000 dot com crash and the 2008 financial crisis) will worsen income prospects, however this is not necessarily a permanent phenomenon. Earnings will recover at some stage over the next twenty or so years before today’s forty-somethings reach pension age.
Inheritance cannot be relied on due to rising care costs: In addition to this, the study seems to imply that those who are middle aged now will only be well off in retirement if they inherit wealth from older generations, while those without an inheritance are doomed to be less well off than current cohorts of pensioners. This analysis is open to question. In particular, many of today’s older generations will need to spend much of their wealth on long-term care, leaving little for their offspring.
People will not necessarily retire in future as they do now: In addition, the study implicitly assumes that people will retire around the same age as today’s pensioners. However, working longer is another solution to this situation. If today’s younger cohorts plan to keep working later than previous generations, preferably on a part-time basis, they could even end up better off than their parents who stopped work at younger ages.
Early retirement was retrograde step for society as life expectancy increased: Only a minority of today’s pensioners actually have good final salary pensions. The majority of pensioners rely heavily on the state pension, which will not provide for a lavish lifestyle. Those who retired early, despite having potentially several decades of life ahead of them, or who have been forced to retire before the abolition of the default retirement age, will have lost opportunities to earn more money. This represent a waste of resources for society as a whole.
Still time to save more and plan to work longer – can end up better off than parents: Even though their private pensions may not be as secure as final salary schemes, today’s younger generations still have time to do more saving and plan to keep earning, to ensure themselves a better later life lifestyle. It is a question of changing expectations. Work on a part-time basis, as a phase of life after a full time career, can generate higher standards of living for future generations. The more people who keep working in later life, the better the long-term economic outlook. The idea of ‘early retirement’s is not something to aspire to, and is likely to lead to later life poverty as life expectancy rises.
Challenges and opportunities of inter-generational comparisons – learning the right lessons: The IFS study demonstrates both the challenge and the opportunity of encouraging more saving, less borrowing and longer working lives. It is in all our interests to learn the right lessons from this research. It is not doom and gloom, nor does it mean younger people are inevitably destined to be poorer than their parents. It is a wake-up call for a new life plan, with a renewed appreciation of the virtues of saving and working more once the economy picks up, as I expect it will next year.