Lucy Parsons is Senior Economics Researcher at Reform. The full report “Money’s too tight to mention: will the IPOD generation ever trust financial services?” is available at www.reform.co.uk.
David Cameron and George Osborne have for some time highlighted the problem of debt in this country, both public and personal. Reform’s latest report shows that there are some clear policy ideas to be grasped around financial responsibility. Improving the financial capability of the next generation could help start an era of "living within our means" and assist the economic recovery.
The finances of Britain’s young adults are looking as critical as the Government’s. The “IPOD generation” – Insecure, Pressurised, Over-taxed and Debt-ridden 18-34 year olds – have run up huge credit card bills and smashed their piggy banks. The mean debt among young adults is around £6,000, and 60 per cent have either no savings or less than £1,000 worth.
The credit crunch is adding to the financial pressures. New or soon-to-be graduates are wondering if their student debts were worth it as companies cut back on recruitment. Those already on the housing ladder are struggling to meet repayment increases. First-time buyers can no longer get a mortgage six times their salary at a cheap rate.
One of the key causes is that this is all so new to this generation. Britain’s young have grown up in a time of economic growth, easy credit and high consumer expectations. They lack the instinctive fears of previous generations which come from experiencing double-digit inflation, 30 per cent unemployment levels and food rationing. This far less risk averse generation has been happy to use financial products without fully understanding them – nearly half of young people do not know the rate of interest they are charged on their main credit card or overdraft.
The “financial establishment” has failed young people. Banks and
financial services are out of touch with young consumers. They are
offering advice at a price beyond young people’s means and providing
outdated products not suited to their flexible lives.
Government policy (both Labour and Conservative) has compounded the
situation. Far from “protecting the consumer”, the heavy increase in
regulation since the 1980s has had the unintended consequence of
removing the onus on individuals to take responsibility for their own
finances. It has also driven up the costs of providing financial advice
exponentially, effectively pricing the younger generation out of the
financial services market.
Interest rates have been kept excessively low for many years, not
reflecting the true cost of capital. This has been a structural
problem in the global economy, not just the UK, and has meant that it
has been cheap to borrow, and indeed more rational to borrow and spend
than to save. Young people in this country have been encouraged to
borrow many times more than their salaries to get on the housing ladder.
The introduction of student loans in 1998 has added to this attitudinal
shift towards debt. Taking on debt to fund higher education is
perceived as beneficial, and as such it has become socially acceptable
for someone in their early 20s to start their career with £20,000 or
more of debt hanging over their shoulders.
While the current economic shifts feel painful right now, there could
be some silver linings. The credit crunch could provide an opportunity
to change the way young people manage their finances.
Young adults are far more tech-savvy and informed than older
generations – they are potentially more capable of managing their
money. They could demand innovative products designed to fit with gap
years, sabbaticals and shorter-term jobs. They could use Facebook and
other social networking sites to share knowledge on financial matters
and create peer ratings for financial advisers. Crucially, young people
could place greater value on investing in their own capability and take
back responsibility for managing and understanding their finances.
Government and financial services must help them. The day-to-day
regulatory burden of financial services could be eased, to reduce costs
and encourage innovation. The financial services industry could create
more simple, flexible products and build the trust that is missing with
this generation. Clear, accessible information is vital.
In this way, financial capability could become an integral part of
individuals’ daily lives and a new part of our national debate. Young
people could become a generation of saviours, creating innovative
solutions to the credit crunch and helping to inaugurate a new period
of investment and growth.