Academic journal article National Institute Economic Review

The UK Savings Gap

Academic journal article National Institute Economic Review

The UK Savings Gap

Article excerpt

We set out a framework for measuring the adequacy of saving in the United Kingdom by assessing the absolute level of savings based on individual preferences of different ages. We examine this relationship between age and savings using data from the Expenditure and Food Survey 2004-5. We show that, while the level of national saving is about 8.4 percentage points of net national income lower than is required if one assumes that each cohort pays its own way, wealth holdings are considerably higher than are required on the same basis. Looking at household, rather than national saving, the current pattern of benefits on public sector pensions removes the need to save for old age. While perhaps 4000m [pounds sterling] of household wealth holding can be accounted for by bequest and other transfer motives, our results suggest excess wealth holding of around 1600m [pounds sterling] in 2004.

Keywords: Savings gap; household and national saving; capital accumulation; bequests and transfer inter vivos

JEL classifications: D10; D31; D91; E01; E21


In recent years there has been considerable discussion of a number of questions associated with the general issue of saving. On the one hand there have been concerns about pensions, leading to the report by the Pensions Commission (2005) and the subsequent proposals for the reform of the state pension system (Department of Work and Pensions, 2006) and for the introduction of the new low-cost National Pensions Savings Scheme. On the other hand there have been fears about levels of indebtedness, partly as a concern over the risks faced by people with large debts but also because, in rather general terms, high levels of debt could be indicative of a failure to make adequate provision for the future. Household savings rates have declined in recent years and this adds to the general sense that saving might be low.

Nevertheless, these observations lack a firm reference point. It is not possible to know whether current savings patterns should be an object of concern without defining an appropriate level of saving. A decline in saving on its own does not distinguish a move from excess saving to adequate saving from a fall from adequate to inadequate savings rates. In this article we answer the question, obviously subject to the range of assumptions needed to define the problem, what should the savings rate be?

Earlier work has looked at this from a macroeconomic perspective (Pomerantz and Weale, 2005). The macroeconomic approach is very straightforward. Given an existing holding of wealth, how much saving is needed for the stock of wealth to grow in line with income--thus sustaining the economy as it is at present. However this approach faces a number of objections stemming largely from the fact that it does not identify what motivates saving. If saving is intended to fund retirement, then a measure of savings adequacy needs to reflect the age structure of the population. If the existing level of wealth is inappropriate then so too will be the measure of required saving delivered by the calculation set out above. In this paper we therefore set out a framework for assessing savings adequacy based on the decisions of representative individuals of different ages.

Our work is closely related to the studies of savings behaviour by Gokhale, Kotlikoff and Sabelhaus (1996) and Kirsanova and Sefton (2006). However both of these authors attempt to explain differences in savings rates, over time in the case of the first paper and between countries in the second paper. We limit ourselves to assessing the absolute level of savings and wealth holding.

Household saving and national saving

In any analysis of savings rates it is important to make the distinction between household saving and national saving. National saving is the sum of the saving of the different institutional sectors in the economy, the household sector, the corporate sector and the government sector. …

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