Some commentators have argued that the returns available to young savers are so low that they shouldn’t bother saving.
It certainly doesn’t help that their disposable income is under the cosh, as the recent report by IF, supported by the Yorkshire Building Society, made clear (see “All Consuming Pressures: The cost-of-living crisis facing younger generations”).
But here are five reasons why it seems wrong to discourage young savers, and five ways that policy-makers could improve the savings outlook for Millennials.
Why it pays young people to save, despite apparently low returns
- Even if returns are low it is still sensible to put aside money for the future, rather than spend everything one has.
- We are in a period of abnormally low returns on capital and when we get into more normal times accumulated savings will then be better rewarded.
- There are some savings which still get good returns, such as the “Help to Buy ISA”, where young people get a government top-up of £50 for every £200 they save.
- For some savers, paying off student debt will be rational where they will in effect be earning 6% pa (the interest rate on student debt) through saved interest payments – in cases where they are likely to pay off the loan eventually through salary deductions.
- Getting into the habit of spending all the cash one has creates a short-term mentality which is damaging in every way. Because saving is as much a habit as a rational choice, spending all one’s money might well encourage short-termism in other areas of life.
Policy changes which could encourage young people’s saving
- The government could incentivise young people’s saving by giving tax breaks, as they have in the past. The old MIRAS rules (tax-exempting income spent on a mortgage) subsidised house purchases, which gave young people an incentive to save enough money for a deposit to buy a flat or house. Indirectly it encouraged and rewarded saving.
- Government could take measures to support young people’s pension saving by adding cash to pension contributions, as it’s done with the Help to Buy ISA. The principle of subsidising young people’s saving has been established – it just needs to be extended.
- Government could help young people to save by reducing some of their high costs, such as commuting costs – so it could, for example, match the over 60s free bus pass with a free bus pass for those under 30.
- New measures could reduce the 41% marginal tax rate that many young graduates pay by, for example, reducing their national insurance contributions. This could be funded by making those over SRA (State Retirement Age) pay National Insurance.
- The Treasury could address the problem that young people are, in effect, paying for two sets of pensions: their own money-purchase schemes (i.e. defined contribution schemes) whilst they are also – through their taxes –paying for the unfunded final salary pensions of the older generation.
The observation that saving is a mug’s game for young people is also a statement about how the dice are loaded against them. Rather than helping them, we are at risk of blaming the victims of historic intergenerational unfairness in pensions, housing, student debt and income.
Policy-makers need to look at the big picture of how young people, as a group, came to be so poor… while, as a group, boomers are OK.
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