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Under the last Labour Government the household savings ratio declined from about ten per cent in 1997 to two per cent ten years later. Then came the crash, when fearing for the future, households began to build up their savings and pay off their debts.

But, now, with the recovery underway, the savings ratio is on the slide again. To some extent this is perfectly rational – interest rates are very low and fears of unemployment have receded.

Of course, the overall household savings measure conceals a great of variation between households – including a large number that live from “paycheck-to-paycheck” without a cushion of liquid assets to fall back on. You might expect these cash-poor households to be low-income, low-wealth households – but, according to Matthew O’Brien in the Atlantic, this isn’t the case. In America, at least, most cash-poor households are, on other measures, quite wealthy:

“…a new Brookings paper… found that about 33 percent of households have very few liquid savings, but, of those, about 66 percent have at least $50,000 in illiquid savings. In other words, someone living ‘hand-to-mouth,’ as the authors put it, is twice as likely to be middle class as poor. And… that’s been true throughout the past 25 years.”

The ownership of substantial, if illiquid, assets is not the only way that richer people without savings differ from poorer people without savings:

“…who are these wealthy cash-poor people? Well, they tend to be older, married, and better-paid… Most poor hand-to-mouth people are younger, peaking around 22 years old and then falling rapidly from there. But most wealthy hand-to-mouth people are in their 30s, 40s, and 50s. It’s a U-shaped distribution: there aren’t many young people who are wealthy and cash-poor, it goes up as people hit middle age, and then it falls as people get to retirement.”

Why are so many well-paid, property-owning married couples living in such a state of financial insecurity? Are they simply buying too much stuff, going on too many holidays? If this was the case, then the answer to their money problems would be obvious. But O’Brien’s argument is that they’re getting in trouble by trying to do the right thing:

“Imagine a couple that’s getting ready to have kids, and wants to buy a house near good schools. Well, that’s expensive… buying a house in a school district you can’t really afford is one of the biggest causes of bankruptcies. Couples can only afford the mortgage with both their salaries, so they’ll get in trouble if either of them loses their job. 

“But even if everything goes right, they’ll still be cash-poor for a long time. They’ll probably have to use most of their savings on the down payment, and use a big part of their income on the mortgage payments…”

This is another reason why we need a more sophisticated answer to the housing crisis than ‘build more houses.’ We can construct as many new developments as we like, but if the good schools are elsewhere we’re still going to see middle class families stretching themselves to the financial limit to move there. Not only does this drive up house prices and undermine the savings culture, it also drags the best state schools into what O’Brien calls a “de facto private system.”

In response, we firstly need to drive-up educational standards across-the-board. It may be impossible to eliminate all differences between state schools, but we can eliminate the downright bad schools. Secondly, instead of making the most educationally-focused parents move to where the good schools are, let’s make it easier for them to set up good schools where they live already. And, finally, where we do build more homes, they need to be planned proactively and at community-scale so that schools and other important local institutions can be properly integrated.

On the other hand, we could just scrap the green belt and hope that it all works out.

7 comments for: How good schools drive the middle classes into debt

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