The Dynamics of Saving and Borrowing

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  • Pension Credit: some 43 per cent of pensioner families will be eligible for it when introduced in October 2003.
  • Those saving towards old age, and house purchase, tended to be saving the highest amounts.
  • One-third of richest decile saving £300+ each month.
  • The Dynamics of Saving and Borrowing

    1. 1. Stephen McKay, Personal Finance Research Centre The dynamics of saving and borrowing University of Bristol, 17 March 2006 Personal Finance I: Savings, Pensions and Debt
    2. 2. Plan <ul><li>Introductory remarks </li></ul><ul><li>Data </li></ul><ul><li>Focus on saving </li></ul><ul><ul><li>Cross-sectional picture </li></ul></ul><ul><ul><li>Some panel results: considerable change </li></ul></ul><ul><li>Outline panel/snapshot results, for borrowing & arrears </li></ul><ul><li>Conclusions </li></ul>
    3. 3. Importance of Saving <ul><li>Retirement Pensions and living standards </li></ul><ul><ul><li>Shift away from state to private sources of income, esp. for those on lower/middle incomes </li></ul></ul><ul><ul><ul><li>SERPS->S2P; 2 Green Papers; SHPs. </li></ul></ul></ul><ul><ul><ul><li>Introduction of Pension Credit </li></ul></ul></ul><ul><ul><li>Alleged £27 billion ‘savings gap’ </li></ul></ul><ul><ul><li>Turner Commission reports: response awaited </li></ul></ul><ul><li>Working age , dealing with adversity and ‘shocks’ </li></ul><ul><ul><li>‘ Asset-based welfare’ </li></ul></ul><ul><ul><ul><li>Child Trust Fund; Saving Gateway </li></ul></ul></ul>
    4. 4. Looking to the future, do you expect your income during your retirement to be …
    5. 5. Overall borrowing <ul><li>Rising levels of borrowing, with secured lending growing faster than unsecured </li></ul><ul><ul><li>But total wealth remains much larger. </li></ul></ul><ul><li>Debt as a proportion of income rising over time, with debt/income reaching 130% compared with <80% in late 1980s </li></ul><ul><ul><li>Trends similar in other OECD countries </li></ul></ul><ul><li>Interest payments/income (debt-service ratio) stable since 1999, and half the level of early 1990s. </li></ul><ul><li>But distributional issues do not reflect the aggregate picture … </li></ul>
    6. 6. Motives to save: Keynes (1936) <ul><li>‘ To build up a reserve against unforeseen contingencies’ (precautionary) </li></ul><ul><li>‘ To enjoy a sense of independence and the power to do things’ </li></ul><ul><li>‘ To provide for future needs of the individual’ [life-cycle hypothesis] </li></ul><ul><li>‘ To bequeath a fortune’ </li></ul><ul><li>‘ To satisfy pure miserliness’ </li></ul><ul><li>‘ To secure a mass de manoeuvre to carry out speculative or business projects’ </li></ul>
    7. 7. Data analysed in the study <ul><li>British Household Panel Study (BHPS) 1991-2001, but especially 1995 & 2000. </li></ul><ul><ul><li>Families and Children Study (FACS) – surveys in 1999, 2000, 2001 and 2002 (… continuing though to 200?). </li></ul></ul><ul><ul><li>ONS 2000 Study of Psychiatric Morbidity Among Adults Living in Private Households . </li></ul></ul>
    8. 8. British Household Panel Study (BHPS) <ul><li>Data for 11 waves analysed: 1991-2001 </li></ul><ul><li>Data on saving for all individuals, for all waves. </li></ul><ul><ul><li>Data on asset levels in 1995, 2000, [2005]. </li></ul></ul><ul><li>Data on borrowing in 1995, 2000, [2005] </li></ul><ul><li>May be used to analyse </li></ul><ul><ul><li>incidence of saving and motivations </li></ul></ul><ul><ul><li>effect of life events on saving/borrowing </li></ul></ul><ul><ul><li>effect of savings/debt on subsequent outcomes (including ‘asset effect’) </li></ul></ul>
    9. 9. Links between credit and saving [2000] 67 33 Owe – overdraft 76 24 Owe – student loan 54 46 Owe – personal loan 54 46 Owe – credit cards 57 43 Owes [any credit] 57% 43% All Not saving Saving ( row percents)
    10. 10. Extent of saving <ul><li>43% of individuals were saving in 2001 </li></ul><ul><ul><li>30% ‘saving regularly’ </li></ul></ul><ul><ul><li>27% saving ‘for the long-term’ </li></ul></ul><ul><ul><li>Average amount £100 per month (median) </li></ul></ul><ul><li>59% of households were saving </li></ul><ul><li>Among working age families over time: </li></ul><ul><ul><li>33% consistent savers </li></ul></ul><ul><ul><li>50% reluctant savers </li></ul></ul>
    11. 11. Range of saving motives <ul><li>Main motives for saving were </li></ul><ul><ul><li>‘ no specific reason’ [41%] </li></ul></ul><ul><ul><li>‘ holidays’ [22%] </li></ul></ul><ul><ul><li>‘ old age’ [9%] </li></ul></ul><ul><ul><li>‘ special events’ [5%] </li></ul></ul><ul><ul><li>‘ house purchase’ [5%] </li></ul></ul><ul><ul><li>‘ car’ [4%] </li></ul></ul>
    12. 12. Saving, regularly, follows a weak life-cycle pattern
    13. 13. Saving among different birth cohorts, by age and year of birth – even weaker ‘life-cycle’ pattern
    14. 14. Higher income associated with saving (and with saving more)
    15. 15. Subjective well-being increases saving – whatever the income [66] 63 66 76 86 5 high 38 59 67 79 83 4 26 45 53 71 74 3 30 31 44 57 55 2 18 13 24 40 54 1 low ‘ Very difficult’ ‘ Quite difficult’ ‘ Getting by’ ‘ All right’ ‘ Comfort-able’ Income quintile
    16. 16. Those with pensions more likely to have discretionary savings
    17. 17. Panel analysis enables us to look at lifetime events <ul><li>Key birthdays, e.g.. </li></ul><ul><ul><li>Age 20 men: </li></ul></ul><ul><ul><ul><li>38% saving, 18% o/p; 13% p/p </li></ul></ul></ul><ul><ul><li>Age 21 men: </li></ul></ul><ul><ul><ul><li>42% saving, 39% o/p, 30% p/p </li></ul></ul></ul><ul><li>Buying a house, before and after </li></ul><ul><ul><li>Saving 43% - 41% </li></ul></ul><ul><ul><li>O/p 31% - 35% </li></ul></ul><ul><ul><li>P/p 18% - 21% </li></ul></ul>
    18. 18. Patterns of saving (1 = saving)
    19. 19. ‘ Types’ of saver 11% £2200 33% 13% Sporadic 71% £1800 37% 53% Consistent non-saver 18% £2500 28% 33% Consistent saver Ever-social tenant Median monthly income Income variability (C.V.) Per cent
    20. 20. Overall patterns <ul><li>All cases analysis </li></ul><ul><ul><li>Around 40% saving in any year. </li></ul></ul><ul><li>Paired-cases </li></ul><ul><ul><li>21% of non-savers start saving in next year </li></ul></ul><ul><ul><li>31% of savers stop saving in next year </li></ul></ul><ul><li>Easier to identify what might STOP saving, than what might START saving – stop-events are decisive; start events are potential. </li></ul>
    21. 21. Events linked to starting to save <ul><li>Av. Rate among non-savers = 21% p.a. </li></ul><ul><li>‘ very difficult’ financially to ‘comfortably off’: 42% </li></ul><ul><li>FT Student => employee: 38% </li></ul><ul><li>Unem => employee: 31% </li></ul><ul><li>Single => married: 31% </li></ul><ul><li>New family => 23% </li></ul><ul><li>Relatively few events have large effects; most people don’t start saving even when they happen. </li></ul>
    22. 22. Events making you stop saving <ul><li>Av. Rate among savers = 31% p.a. </li></ul><ul><li>Finances ‘comfortable’ to ‘quite difficult’: 80% </li></ul><ul><li>Employee: </li></ul><ul><ul><li>to unemployed: 72% </li></ul></ul><ul><ul><li>to family carer: 61% </li></ul></ul><ul><ul><li>to long-term sick: 59% </li></ul></ul><ul><li>Reaching SPA: 42% (men); 35% (women) </li></ul><ul><li>New family: 41% </li></ul><ul><li>Married => divorced/separated: 47% </li></ul><ul><li>Some events usually lead to end to saving </li></ul>
    23. 23. Savings behaviour <ul><li>Many people not saving </li></ul><ul><li>Considerable change among individuals over time </li></ul><ul><li>Patterns with age and income clear, but not particularly strong </li></ul><ul><li>But a strong link between subjective well-being and saving behaviour </li></ul>
    24. 24. Owe money by BHPS variable age
    25. 25. Owe money by BHPS variable religion (ioprlg1)
    26. 26. Credit commitments (BHPS/NMG) £9,000 £5,000 Top 10% 9 2 £5,000 £2,000 51 36 2000 9 Somewhat of a burden 3 Overall: Heavy burden £2,700 Top quarter £890 Median amount owed 50 Owe anything, among households 34 36 Owe anything, among individuals 2003 Bank 1995
    27. 27. Has arrears on credit or bills [ONS Survey]
    28. 28. Borrowing tends to persist, with turnover (BHPS 1995 & 2000)
    29. 29. Borrowing tends to persist, with turnover higher for 20-59 year-olds (BHPS 1995 & 2000)
    30. 30. Arrears also generally short-lived (FACS) <ul><li>One family in three (34%) with arrears in one year didn’t have them the next. </li></ul><ul><li>Conversely, one family in four (26%) without arrears in one year did have them the following year. </li></ul><ul><li>Arrears on household bills are more persistent than on consumer credit (under half, compared to more than half, exit such arrears each year). </li></ul>
    31. 31. Conclusions <ul><li>Considerable change among individuals both with respect to saving and borrowing </li></ul><ul><li>Patterns with age and income clear, but not particularly strong </li></ul>

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