Savings are good for us. Someone with savings has protection against unforeseen calamities and provision for their retirement. A society with savings has a collective buffer against economic downturns, a more stable banking sector and fewer people reliant on the taxpayer when they grow old.
Given those benefits, encouraging a saving culture – both in terms of storing cash against a rainy day and in terms of building up a pension – should be an obvious decision for any government to make.
And yet we are in the midst of a savings disaster. According to research by Aviva, 31 per cent of British families save absolutely nothing each month. 23 per cent of families have no savings whatsoever. The average household has £12,834 of debt, which they spend £258 a month repaying, and saves or invests only £96 a month.
The picture for pensions is even worse. ONS figures reveal that 35 per cent of employees have a workplace pension, and even fewer have a private pension scheme. Fewer and fewer young people have a pension at all, while the public sector runs vast unfunded pension liabilities – £54 billion in local government alone.
Anyone should be concerned about such a situation. Conservatives in particular should be worried – after all, savings are a symptom of a culture of personal responsibility, which prioritises long-term security over short-term gratification: in short, a conservative culture.
The uncomfortable point comes when we ask why people are shunning saving. As rational actors, why would the population refuse to do something so beneficial? To a depressing degree, the answer is in their rationality – poor government policy over the course of decades has punished them for doing the right thing, and they have learned the lesson accordingly.
Poor economic conditions have certainly played a part – people dipped into their savings for obvious reasons during the recession, for example – and people’s confidence in the security of saving was knocked by the collapse of the banks, too, but these factors don’t provide a satisfactory explanation for the long term trends afflicting us.
Part of the responsibility must also lie with the pension companies who construct bafflingly complicated products, often fail to be activist shareholders on the part of their clients and charge increasingly exorbitant fees for the privilege. The same goes for the banks which unscrupulously tempt people in with temporary rates and then obfuscate about the low returns once a few months have passed.
But governments and regulators have much to answer for, too.
Interest rates sit crushingly low, meaning savers’ money has ceased to work for them when in the bank. Why put your cash away for years only to see it diminished as inflation outstrips your paltry rate of interest?
Gordon Brown’s tax raid on pensions hammered those who prepared for retirement, wiping an estimated £100 billion off the value of UK company pension funds. Why invest in a pension only to have yet more of it disappear to the taxman?
The same Chancellor introduced the pension credit in 2003 which, as the Save Our Savers campaign point out, rewarded those who had not saved into a pension while making the marginal rates so severe for low earners that they would be “no better off than if [they] had not bothered to save at all”. Why lock your hard-earned funds away for years only to see people who splurged it all do just as well as you?
The prospect of Brown’s apprentice, Ed Balls, threatening this week to remove further tax reliefs from pensions deters even more saving by creating uncertainty over future policy. Why spend the next two years putting money into a pension if Chancellor Balls might appear in 2017 to make your scheme more expensive and less worthwhile?
Both Labour and – shamefully – the Coalition gave themselves powers to seize money in bank accounts they deem “dormant” to fund government projects, despite the fact that leaving cash in the bank is the very definition of saving. Why put money in the bank for the long-term if the Government just steal it because you haven’t been using it?
The rhetoric has been as bad as the reality. Labour hijacked the word “invest” to mean “spend”, validating the idea that we could all live beyond our means forever now that the risk of a bust had been abolished. When the financial crisis struck, some politicians and policy-makers compounded the error by haranguing the public to go out and spend what little they had stored away, driven by the Keynesian mantra that if only we splash our savings or even borrow more then the economy will spring back to life.
Conservatives should try to right these wrongs. For practical and moral reasons, saving should be encouraged through warm words and warmer policies.
An obvious way to start improving everyone’s capacity to put money away would be to reduce taxes. More disposable income naturally increases the likelihood of it being disposed of in savings accounts and pension funds.
More specifically, the tax grabs on pensions should be reversed. As a social good, it is wrong for politicians to view pensions as a pot to pillage – the impact can be seen in the number of people fleeing pensions for the tax-free haven offered by ISAs. By saving for their retirement, workers are taking responsibility for their own future and reducing the cost to future taxpayers. Pension savings should also be a normal inheritable asset, not something that disappears or is eaten up by exorbitant tax rates.
Similarly, if we want people to protect themselves against unforeseen events, and to recapitalise the banks while doing so, then we should eliminate basic rate income tax on all income from savings.
Consumers ought to gain new rights to better navigate the savings market. Banks should be required to make the interest rates they are paying clear and transparent to customers, while pension funds should have a fiduciary duty to their clients to actively manage the investments made on their behalf.
Savers ought to figure on the Bank of England’s list of people about whom they are concerned. Mark Carney should urgently reconsider his decision to introduce yet another barrier to raising interest rates in the form of the unemployment rate.
Government ministers should ditch the phoney language of debt-fuelled “investment” and praise savers as apostles of the approach which they claim to be bringing to the public finances – the idea of living within your means. Moreover, they should practice what they preach by going further to eliminate the deficit.
It isn’t enough for policy makers to rant about the masses refusing to save, or for experts in ivory towers to tear at their hair as the British workforce abandons pension saving. We must recognise that the people aren’t stupid – they act as they do for a good reason. The reason is that politicians, and those they oversee, have made saving a fools’ game – disaster will only be averted by making it worthwhile again.