From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    Savers – sacred cows or sacrificial lambs?

    Savers – sacred cows or sacrificial lambs?

    I have been engaged in a lengthy twitter engagement with @IzaKaminska and we have agreed to disagree.  Her first post on our debate was entitled ‘Savers are not sacred cows’ and can be found here http://dizzynomics.wordpress.com/2013/08/12/savers-are-not-sacred-cows-redux/.

    I feel her arguments and those of others with similar views, are important to air.  I fundamentally disagree with their analysis, but I may of course be wrong.  They contend that we are actually in a deflation and there is not really any inflation – that consumers and savers can be better off each year as a result of technological advances, special offers, free services and so on.  If there is deflation, then of course savers’ capital and income are not being eroded by what appear to be negative real interest rates.  My view is that inflation is real and is taking away the spending power of both savings and also of wages.

    I am copying below @IzaKaminska’s latest blog, called ‘Who is the average saver?’ which discusses my comments about how savers are suffering and I have annotated the blog with my own responses which are in underlined italics.  The link to it is here:  http://dizzynomics.wordpress.com/2013/08/14/who-is-the-average-saver/

    I hope you will find it of interest and would welcome your comments.  Economic debate is important for us all.

    Who is the average saver?

    Posted on

    Ros Altmann and I will obviously never see eye-to-eye. I’ve suggested we disengage as it’s turning into a pointless spat.

    But I am a bit miffed by her closing tweet:

    @rosaltmann: @izakaminska happy to disengage if you wish. I respect your views but care about average person who is being damaged. Lets agree to disagree

    This is a suggestion that I don’t care about the average person!
    This is obviously not the case.  I am sorry if you took offence at this, none was meant.  I do still believe that the average British citizen is being damaged by the policy of low rates.  Low rates are helping a minority of the population, especially the better off people in the south, aged in their 30s, 40s and possibly 50s, who own their own homes with a large mortgage.  The average person I have in mind earns a salary of around £26,000 a year, does not have large debts, either rents or has paid off their mortgage and does not wish to be a burden on others, therefore tries to live within their means, without too much borrowing, or carefully borrows only what they can reasonably afford.  (ONS figures show that the average salary is around £26,000 a year).

    First of all, is the average person even a saver?

    I fear Ros is coming at it from a very skewed perspective. Largely, from the point of view of a very specific generation and one that’s closer to her age group. One which has also benefited the most from growth and which Is now leeching on the much less wealthy younger generation, refusing in many cases to pass that wealth down by stubbornly clinging to principal so as to live off “returns” rather than actually spending the principal.  Obviously, I am coming at this from a different perspective to Izzy, however this is not just about age group.  I am concerned about the young, who are finding it hard to make ends meet, hard to find a job, hard to cope with their student debts (which are not repaid at base rate) and hard to afford rents as house prices rise.  As far as older generations are concerned, to suggest they are ‘leeching’ off the young is to misunderstand lifecycle finances.  First of all, it was these generations who created the growth through their own working lives, usually from the age of 16.  When these people were younger they were also much less wealthy too, but did not expect to be better off than their parents until later life, not did they expect that others should bale them out if they were in trouble.  These older generations have delayed consumption while they were younger, in order precisely not to have to rely on the state (i.e. younger taxpayers) to ensure they have a better lifestyle when they are retired.  Those who do have money set aside do not have it just through ‘luck’.  It was planned, and they were always told to provide for their own futures if they could.  The idea that we can just live for today, spend all our money or even borrow more to keep on spending beyond our incomes is unsustainable.  It will end in bankruptcy.  Indeed, the encouragement of too  much borrowing to generate growth, and reliance on ever-rising asset prices, especially housing, is one of the root causes of the crisis.  As for ‘clinging to principal’, the rationale is once again to have money to fall back on when later life needs require some spending and retirement means no way of earning extra.  For example, major house repairs or social care needs require capital.  The ‘return’ on that capital is required for costs of living and, of course, eventually there will be a need to use the capital for required spending as years go on.

    I would argue that the average person is a borrower who has a low salary job and is exposed to interest rates.  The majority of the population are not borrowers.  Only one third of households own a home with a mortgage.  One third rent their homes and one third own their homes outright.  So two thirds of UK households either do not benefit from low mortgage rates, or are hurt by them as rent rises result from rising house values.  The ‘average person’ may have credit card debt, but credit card interest rates are at record highs, so the low rate environment has not benefited them.

    There are now more savers than productive uses of capital, or more specifically not enough savers who are prepared to take the risk needed to ensure the borrowing economy receives the loans they need. There is a mismatch between saver risk appetite and the actual risk in the system.  There has always been an important distinction between ‘savers’ and ‘investors’.  Many savers are also investors, but the sums they have saved in deposit or bank and building society accounts or money  market funds were designed to be their safe savings.  Their pension funds or other investment assets, which are invested in equities, fixed income and pooled investment funds, were aiming for higher returns and could have capital at risk.  The money that savers deposited was put there precisely because they could not afford capital losses on this part of their assets.  Some low-earners could not afford to take any risk and had no other assets, but had foregone consumption in order to ensure they could provide for themselves in later life, without being a burden on others.  If the banking system were fulfilling its functions properly, savers’ deposits would be earning a low or even zero real return, (perhaps around 3% currently) while the banking system used those deposits to lend money for productive purposes, such as for small businesses to expand.  They would lend at higher rates than 3%, at rates that would give them a risk and profit margin, assuming they lent wisely.  The banks have stopped fulfilling this function.  This is partly because they can get so much newly created money at very cheap rates, they no longer need savers’ deposits.  Secondly, because they can be far more choosy about who they lend to and are imposing unreasonable terms on companies so they are minimising the risks they are willing to take.  Yet that should be their economic role – to take risks that others are far less well-equipped to take – and support economic activity.  It should not be up to savers to do this, indeed savers simply do not have the expertise to do this.  Would we expect the NHS to ask all patients to operate on themselves when they are sick?

    Does my point that savers should not expect high returns no matter what “damage the average person”?


    The average saver needs to invest their money to suit their need for risk/return or have a professional do it on their behalf. If they want high returns they need to take risk. If they want zero risk, they have to accept zero return. Zero real returns might be acceptable, negative real returns are not, unless we want to undermine savings altogether.

    And btw they had every opportunity to lock in high yields on government debt for up to 50 years before the crisis struck when interest rates were high. They didn’t do this because they wanted to have their cake and eat it.  The whole point of people’s savings is that this is money they cannot afford to ‘lock away’ for 50 years.  The majority of savings are in accounts with less than 2 years’ maturity.  It is money people are worried they may need to spend soon.  If they do not need to, that’s fine, but they need to have the availability for foreseeable precautionary events.  As many of them will not need to spend it, the banking system used to be able to lend it out and rely on multipliers to oil the wheels of the economy, while still being able to pay out to those savers who do find they need their capital.

    Last point. No one is damaging savers. The point really is that fewer savings are required during a depression of this sort. This is not a depression.  We have economic growth and above target inflation.  This is because the purchasing power of an average pound keep increasing — the proliferation of pound shops, bargain discounters, and 2for1 offers is testament to that — but also because welfare and social spending begins to provide many of the services these savers used to have to spend money on directly.
    The base essentials are increasingly taken care of. This is just not the case.  People’s purchasing power is falling, not rising.  More of their money is spent on essentials that are rising in price.  Welfare and social spending is not the answer and does not provide a decent standard of living – only the bare essentials.  Society requires people to be able to finance themselves, not rely on the state.  Current policies are encouraging the precise opposite of what is required for longer term economic welfare.

    Also via the rise of the collaborative economy and technology savers have a bundle of goods and services that they either never had before or which they can now access entirely for free.

    I think it’s fair to say that if anyone has time to go couponing, price comparing or discount hunting it’s the no longer working retired population.

    If you really think about it the older generation has in many ways become a prime beneficiary of today’s changing economy in real terms.

    Their lack of mobility, for example, is becoming less of an issue.

    The retired can benefit from the lowest telecoms costs ever. They can engage on Skype and the Internet nearly for free (at least until universal Internet is provided). The cost of the instruments that afford them this connectivity to friends and relations is falling all the time. What’s more they can make new friends online like never before. Loneliness is increasingly a thing of the past.

    This alone offers a huge improvement to living standards.  This is not a practical reality for millions of people in this country.  Again, to use a medical analogy, we cannot expect the untrained person to be able to diagnose his or her illnesses or treat themselves if they require surgery, or even acupuncture.  This needs to be carried out by trained experts.  Yes, information may be available on the internet, but firstly the information is not always reliable, secondly it requires skills that many people do not possess and thirdly many people are simply not on the internet because they can no longer learn how to be.  That is a fact, not a lifestyle choice or function of laziness.

    But there’s more!

    Home swapping can afford them the best holidays in the world.  The physical dangers of this make it impractical for the majority.

    They can have their groceries delivered to their front door for no extra cost.  Then they cannot get the cheapest offers.

    They have access to all the entertainment , news and literature in the world for free on the Internet. See above points about internet capability.

    Clothing can be purchased in some cases nearly for free through clothes swap/disposal sites. New clothing can also be sourced for unbeatable prices.
    Again delivered to the door reducing the need for external outings.  This will help some perhaps.

    Food and essentials are reduced for anyone who has the time to take advantage of offers (which the elderly do).  The best offers apply in bulk, which older people cannot take advantage of, nor can youngsters living on their own.

    The only real ongoing cost the retired face is energy. But even here smart meters and the breaking apart of the energy supplier monopoly will be soon making a difference and subsidies from the government are becoming available.  This does not reflect lifestyle realities for many of the older population.  If they have oil central heating or rely on gas canisters (yes those living in older houses may not even be in the gas grid) they cannot buy in bulk and their heating bills are huge.  Many older houses are less fuel-efficient too.

    The continuously improving NHS also means that medically the elderly increasingly want for nothing.  Medical advances help all ages.

    In short, I don’t think there was ever a better time to be facing retirement.

    Obviously more can be done. For example more government benefits should be bestowed on the elderly, but that is a different type of government policy issue quite separate to monetary policy. And overall the private sector is providing major benefits to the elderly already.  Society cannot run by just ‘bestowing benefits’ on people.  It is vital that people look after themselves as much as possible, rather than just living for today and assuming society will rescue them later.

    Who knows, in the near future we may even see robotic carers and companions enter the market a la Robot and Frank.

    I sense the reason Ros Altman and her legion of hard-done-by savers don’t see any of this is because quite frankly they are not representative of normal people at all.  This seems to represent a clash of ideologies.  Certainly, those who feel that borrowing has to be repaid and that taking on too much debt, or spending all one’s income immediately is a short-sighted and ultimately damaging lifestyle, are what I would consider ‘normal’.  If you only mix with people who believe borrowing is the only way to live and saving is for mugs, then you will consider that to be normal.  I cannot tell you who is normal, my view is that those who borrow are becoming increasingly numerous but are by far the minority and are concentrated in the south of the country and age groups below 55, however these are both viewpoints.

    These are savers who probably expected to live much more lavishly in relative terms. The base improvements thus completely pass them by. Or these savers can’t be bothered to discover the opportunities that are available to them via the Internet and technology because they stubbornly refuse to learn new skills. “I don’t do twitter, the Internet, websites”.  See my earlier comments

    Luckily there are plenty of digitally savvy elderly who do redeem the benefits.  Yes, that’s true, but don’t forget the millions who are not.

    Anyone who has stashed away principal to live off returns should just start spending the principal today. And then what happens when they need money for house repairs or social care?

    At which point I should mention my mother died before she could make use of her savings. She hoarded everything and probably expected to pass down as much to her kids as possible rather than spend it on herself. She would have fitted the Ros Altman moaning saver profile to a Tee.  My father died in his mid fifties but I still do not think one can live for today without putting aside provision for the future, just in case one doesn’t live to see that future. 

    My dad, thankfully, gets it. He is now spending that money and using it to travel the world and do the things he always wanted to. This can continue for as long as he has the mobility (and he’s only in his 60s so for a while yet!). And that is as it should be. I’ve already benefitted immensely from their wealth in my upbringing. If there’s nothing left in the pot after he’s done with all that then that’s fine. Plus, he still has the equity in his house — as many of Ros’s savers do as well — as a fallback.  This is all part of the provision needed for the future in retirement.

    If he lives beyond the exhaustion of his savings and house equity he will simply become a dependent of the state. But the state has a duty of care here which it can totally manage and afford.  I really fundamentally disagree with this short-sighted approach – it is simply not being a responsible member of society to spend everything one has today and then turn to others to support us later.  We need to make our own provision too, with a safety net if disaster strikes, rather than relying on safety nets as a lifestyle choice.  I see your point of view, but ideologically find I cannot agree.

    By the time he is in his 80s I would imagine google self driving cars will have cut transport costs and created an unbeatable car pooling scheme for his occasional excursions outside of home. Home deliveries will be the norm for everything. He may have a robot carer. He’ll be spending more of his time in a virtual reality game where his reduced mobility is not an issue. His consumption needs will be taken care of by a 3D printing food device. And so on…  Bottom line is – if we fail to realise the need for savings and the difference between savings and investment, we will endanger the future of society itself.  Both savings and investments have a role to play in a sound economy.  Borrowings have to be repaid, and investments have to be converted into savings over the lifecycle.  Older people will need to repay their debts to prepare for retirement.  A retirement in which they strive to look after themselves, their families and hopefully others via voluntary or caring work too, rather than rely on handouts from others.

    This is the original post from Dizzynomics about savers and why they should not expect to earn decent returns on their savings, as well as suggesting that there is deflation, so savers are becoming better off all the time.


    I feel these views are important to air, even I disagree, since that is what makes for healthy economic debate.

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