As the savings ratio collapses to a five-decade low, savers are now a dying breed. Can we rediscover the joys of saving?
We Brits have all but given up on saving for the future. That's what emerges from the latest data from the Office of National Statistics (ONS). Indeed the savings ratio (which measures the proportion of our take-home pay that we save) has collapsed to a level not seen in almost fifty years.
For the record, the savings ratio now stands at 2.1%, which is its lowest level since the beginning of 1960. In other words, of every £50 that we receive in take-home pay, we're saving only a quid, which is, quite frankly, a national disgrace!
The ONS blames the collapse in the savings ratio on five things: a rise in the tax burden on individuals; higher debt repayments caused by rising interest rates; increased household spending; wages rising at a slower rate; and reduced special contributions by employers into pension funds.
Although I've been monitoring the savings ratio for over fifteen years, the latest figure still came as a shock to me. Although I knew this ratio was being squeezed by tighter household budgets, I had no idea that things were looking quite so terrible. Indeed, as you can see from the table below, the savings ratio actually climbed in 2005 before starting its recent dive:
Year | Savings | Year | Savings |
|---|---|---|---|
1991 | 10.3 | 2000 | 5.1 |
1992 | 11.7 | 2001 | 6.4 |
1993 | 10.7 | 2002 | 5.0 |
1994 | 9.3 | 2003 | 4.9 |
1995 | 10.2 | 2004 | 3.7 |
1996 | 9.4 | 2005 | 5.6 |
1997 | 9.5 | 2006 | 5.0 |
1998 | 7.0 | Q1 2007 | 2.1 |
1999 | 5.3 |
Although the long-term average for the savings ratio is around 8%, we're only saving at a quarter of this level at present. How come? Well, I can think of three reasons why the savings ratio is depressed:
1. House prices have risen dramatically for over ten years, creating a 'wealth effect' that makes us less worried about saving for the future. A similar event took place during the Eighties housing boom.
2. When the economy is growing strongly, unemployment is low and consumer confidence is high, we tend to spend more and save less. The UK economy is currently growing at about 3% a year, which is above its long-term trend.
3. When inflation (the tendency of consumer prices to rise over time) is relatively high, we feel a greater need to save as a hedge against higher prices in future. As yearly inflation is in low single digits (and not the 10%+ that we experienced up until the early Nineties), so is the savings ratio.
So, all is rosy in the UK economy, right? On the contrary, I'm desperately worried that our failure to save will simply store up problems for the future, when the global economy flips from boom to bust.
Here in the UK, we are struggling with rising personal debt levels, a huge surge in insolvencies and bankruptcies, rising interest rates, and the potential for overvalued house prices going into meltdown. And yet still we don't save!
In summary, if you feel that the good times are always going to roll, then feel free to keep overspending and avoid saving (but, in my view, you are in danger of spending your way into misery). On the other hand, if you feel -- as I do -- that UK consumers are in line for a sharp shock to the system, then start saving more (or paying down your debts) now. Otherwise, you too could be caught up in the next financial hurricane!
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