If you spend a lot of time pondering what adventures you will take, and what treats you will buy yourself when you retire, then Andrew Hood and Robert Joyce of the London-based Institute for Fiscal Studies have some bad news for you. Unless you have family that is flush with money, that is. This is especially true of those people born after the 1960s. The quality of life has improved--so the expectations are higher, as is spending. And the savings rate has declined, so there is less banked to pay for future expenditures. From the report: Figure 2.7 confirms that differences in income across cohorts have translated more or less fully into differences in spending. In other words, the amounts being actively saved by younger cohorts have been no higher, despite their higher incomes. The figure shows age profiles of median household saving–defined as income minus expenditure–for the same four cohorts shown in Figure 2.6. If savings rates had remained constant over time and between cohorts, we would expect to see higher absolute savings amounts among more recent cohorts, as they would have been saving the same proportion of a higher income. In fact, at almost every age, the 1960s and 1970s cohorts saved less at the median than their predecessors had; and this ‘age-adjusted’ saving gap between cohorts has been growing (to around £60 per week between the 1940s and 1970s cohorts) as has been growing (to around £60 per week between the 1940s and 1970s cohorts) as savings rates declined significantly across the population from the l ate 1990s. 16 Such a decline matters more for younger cohorts, all else equal, as it affects their accumulation of wealth over a larger portion of their lives (if the trend is persistent). For example, the median flow of active saving out of take - home income was positive up to the age of 55 for the 1940s cohort, but has been negative for the 1960s cohort since they were in their mid - 30s. Two important points are worth noting. First, the higher spending of younger cohorts relative to older ones suggests that, all else equal, they have had higher living standards early in adulthood than their predecessors had. Second, it is possible that their lower savings rates are ‘optimal’ for them if, for example, they reflect lower credit constraints during periods of temporary low income than were faced by previous cohorts. Indeed, there is evidence from the US suggesting that most individuals born between 1931 and 1941 had actually built up at least as much wealth as was optimal for them, and many appeared to have ‘over - saved’. 17 In other words, under the assumption that people generally prefer to have smooth flows of consumption over time (all else equal), they appeared to have spent too little early in life relative to the resources they will have available later. It is possible that the same is true in the UK and that the lower savings rates of later cohorts are actually a move towards optimality. 18 This does not change the implications of this analysis for the relative economic position later in life of different cohorts, but it may affect the appropriate policy response. In summary, individuals born in the 1960s and 1970s have saved no more past take - home income than their predecessors had by the same stage in life, despite having had considerably higher incomes from which to make such provisions. In addition, the lack of income growth over the past decade means that, when compared with the previous 10 - year cohort at the same age, they no longer have higher flows of income. Download the full report here . Hat tip Jason Karaian, Quartz .
Filed under: spending, global economy, saving, retirement, retirement accounts, retirement age, robert joyce, institute for fiscal studies, jason karaian, retirement savings, andrew hood, quarts