Stephen McKay, Personal Finance Research Centre

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
Plan

• Introductory remarks
• Data
• Focus on saving
• Cross-sectional picture
• Some panel results considerable change
• Outline panel/snapshot results, for borrowing
  arrears
• Conclusions

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Importance of Saving

• Retirement Pensions and living standards
• Shift away from state to private sources of
  income, esp. for those on lower/middle incomes
• SERPS-gtS2P 2 Green Papers SHPs.
• Introduction of Pension Credit
• Alleged 27 billion savings gap
• Turner Commission reports response awaited
• Working age, dealing with adversity and shocks
• Asset-based welfare
• Child Trust Fund Saving Gateway

4
Looking to the future, do you expect your income
during your retirement to be
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Overall borrowing

• Rising levels of borrowing, with secured lending
  growing faster than unsecured
• But total wealth remains much larger.
• Debt as a proportion of income rising over time,
  with debt/income reaching 130 compared with lt80
  in late 1980s
• Trends similar in other OECD countries
• Interest payments/income (debt-service ratio)
  stable since 1999, and half the level of early
  1990s.
• But distributional issues do not reflect the
  aggregate picture

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Motives to save Keynes (1936)

• To build up a reserve against unforeseen
  contingencies (precautionary)
• To enjoy a sense of independence and the power
  to do things
• To provide for future needs of the individual
  life-cycle hypothesis
• To bequeath a fortune
• To satisfy pure miserliness
• To secure a mass de manoeuvre to carry out
  speculative or business projects

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Data analysed in the study

• British Household Panel Study (BHPS) 1991-2001,
  but especially 1995 2000.
• Families and Children Study (FACS) surveys in
  1999, 2000, 2001 and 2002 ( continuing though to
  200?).
• ONS 2000 Study of Psychiatric Morbidity Among
  Adults Living in Private Households.

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British Household Panel Study (BHPS)

• Data for 11 waves analysed 1991-2001
• Data on saving for all individuals, for all
  waves.
• Data on asset levels in 1995, 2000, 2005.
• Data on borrowing in 1995, 2000, 2005
• May be used to analyse
• incidence of saving and motivations
• effect of life events on saving/borrowing
• effect of savings/debt on subsequent outcomes
  (including asset effect)

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Links between credit and saving 2000
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Extent of saving

• 43 of individuals were saving in 2001
• 30 saving regularly
• 27 saving for the long-term
• Average amount 100 per month (median)
• 59 of households were saving
• Among working age families over time
• 33 consistent savers
• 50 reluctant savers

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Range of saving motives

• Main motives for saving were
• no specific reason 41
• holidays 22
• old age 9
• special events 5
• house purchase 5
• car 4

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Saving, regularly, follows a weak life-cycle
pattern
13
Saving among different birth cohorts, by age and
year of birth even weaker life-cycle pattern
14
Higher income associated with saving (and with
saving more)
15
Subjective well-being increases saving whatever
the income
16
Those with pensions more likely to have
discretionary savings
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Panel analysis enables us to look at lifetime
events

• Key birthdays, e.g..
• Age 20 men
• 38 saving, 18 o/p 13 p/p
• Age 21 men
• 42 saving, 39 o/p, 30 p/p
• Buying a house, before and after
• Saving 43 - 41
• O/p 31 - 35
• P/p 18 - 21

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Patterns of saving (1 saving)
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Types of saver
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Overall patterns

• All cases analysis
• Around 40 saving in any year.
• Paired-cases
• 21 of non-savers start saving in next year
• 31 of savers stop saving in next year
• Easier to identify what might STOP saving, than
  what might START saving stop-events are
  decisive start events are potential.

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Events linked to starting to save

• Av. Rate among non-savers 21 p.a.
• very difficult financially to comfortably
  off 42
• FT Student gt employee 38
• Unem gt employee 31
• Single gt married 31
• New family gt 23
• Relatively few events have large effects most
  people dont start saving even when they happen.

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Events making you stop saving

• Av. Rate among savers 31 p.a.
• Finances comfortable to quite difficult 80
• Employee
• to unemployed 72
• to family carer 61
• to long-term sick 59
• Reaching SPA 42 (men) 35 (women)
• New family 41
• Married gt divorced/separated 47
• Some events usually lead to end to saving

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Savings behaviour

• Many people not saving
• Considerable change among individuals over time
• Patterns with age and income clear, but not
  particularly strong
• But a strong link between subjective well-being
  and saving behaviour

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Owe money by BHPS variable age
25
Owe money by BHPS variable religion (ioprlg1)
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Credit commitments (BHPS/NMG)
27
Has arrears on credit or billsONS Survey
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Borrowing tends to persist, with turnover (BHPS
1995 2000)
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Borrowing tends to persist, with turnover higher
for 20-59 year-olds (BHPS 1995 2000)
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Arrears also generally short-lived (FACS)

• One family in three (34) with arrears in one
  year didnt have them the next.
• Conversely, one family in four (26) without
  arrears in one year did have them the following
  year.
• Arrears on household bills are more persistent
  than on consumer credit (under half, compared to
  more than half, exit such arrears each year).

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Conclusions

• Considerable change among individuals both with
  respect to saving and borrowing
• Patterns with age and income clear, but not
  particularly strong