The worrying story about wealth

While the current government talks up the economic prospects for the country, it is becoming clear that the recent economic downturn has left many less well off. In  the second of our Society Central articles reviewing new evidence from the Social Market Foundation Wealth in the Downturn report, its Director, Emran Mian highlights some of the key issues facing young people and the choices they will have to confront.

Photo credit: B Rosen

The common view is that people have focused on paying down debt since the recession, but that debt will rise again over the next few years, perhaps sustainably if incomes are rising at the same time.

The latest forecasts of GDP growth to some extent rely on that assumption but if consumer spending doesn’t rise, then growth may be weaker than supposed.

New research from the Social Market Foundation (SMF) and the Understanding Society Policy Unit at the Institute for Social and Economic Research (ISER) reveals that there are a number of problems with this view.

Winners and losers

While it is undoubtedly the case at a macro-level that debt overall has declined since the recession, it didn’t decline in all parts of society. Wealth in the downturn compares the levels of financial wealth (savings and investments) and debt (including loans, overdrafts and hire-purchase agreements but excluding mortgages) of individuals in 2012-13 (the latest available data) against individuals in 2005.

The report uses data from the British Household Panel Survey (BHPS) and its successor Understanding Society.

The first issue the report highlights is that only those in older age groups and on higher incomes were able successfully to deleverage during this period. Of those with incomes in the top 20%, the proportion with debt fell from 43% in 2005 to 31% in 2013. Equally their average financial wealth rose by 64%.

By contrast, the report finds that for a large number of people, the imperative is not to increase spending but to rebuild their personal finances as their incomes begin to rise in real terms.

Critically, the lowest income group – those with incomes in the bottom 20% – are substantially less financially secure today than those on the lowest incomes going into the downturn.

On average, those on the lowest incomes have less than six days’ worth of income in savings; and by 2012-13, average financial wealth among the lowest income group was 57% lower than in 2005.

Over the same period, the proportion of those on the lowest incomes with debt increased; and the value of that debt rose faster than incomes – by 67%, equivalent to around 28% of their income.

Intergenerational gap

Another way to look at this is to compare the changes in wealth and debt by age group. The report finds that, just as the gap between the rich and the poor has widened, the intergenerational gap in incomes and wealth has widened too.

People in the 26-35 age group today are less likely to own a home. In 2005, 74% of 26-35 year olds owned a home; by 2012-13, this had dropped to 54%. Equally the amount 26-35 year olds have in savings has fallen by 36%.

On average, they have less than one week’s worth of income in savings. The proportion of 26-35 year olds in debt has fallen slightly, however the amount debt-holders in this age group owe has increased by 45%.

This poses two challenges:

  1. The first is the obvious one about revised expectations. This younger generation isn’t experiencing the strengthening of their financial resilience as they grow older that a previous generation did before them. But this is more than a private matter.
  2. The second challenge is that this generation bears, if you like, important economic and social responsibilities most profoundly. They will be helping to look after their parents and grandparents as well as bearing children while trying to keep their skills relevant in a changing labour market.

More parochially, the economy may rely for its growth potential on their consumer spending, which is likely to be higher than that of an older generation and which may be more focused on saving for future care costs or retirement.

Access to credit

Now it may be that 26-35 year olds will have sufficient access to credit that they can finance both the profound and parochial choices we may be relying on them to make. Or it may be that their incomes rise significantly over the next few years as the economic recovery continues.

Another possibility is that, either within families or through government action, a transfer of wealth takes place from the older generation that has done well through the downturn to the younger one.

For now what is clear from this new research is that there has been something disquieting going on since 2005, both among this age group and among those on the lowest incomes.

The report tries to put that problem in the spotlight. The next step is to think about what policy responses may be needed to deal with it.