The Dynamics of Saving and Borrowing

Stephen McKay, Personal Finance Research Centre

The dynamics of saving and borrowingUniversity 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

3 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->S2P; 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 …

3725

16 15 13

519

26 23 20

0%

20%

40%

60%

80%

100%

16-19 20-29 30-39 40-49 50-59 Age group

Per

cen

t

Less thanenough to meetyour needs

Just aboutenough to meetyour needs

More thanenough to meetyour needs

5 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

<80% 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 …

6 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’

7 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.

8 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’)

9 Links between credit and saving [2000]

(row percents) Saving Not saving

All 43% 57%

Owes [any credit] 43 57

Owe – credit cards 46 54

Owe – personal loan 46 54

Owe – overdraft 33 67

Owe – student loan 24 76

10 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

11 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%]

12 Saving, regularly, follows a weak life-cycle pattern

05

1015202530354045

16-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

Per

cen

t sa

ving

reg

ular

ly Men

Women

13 Saving among different birth cohorts, by age and year of birth – even weaker ‘life-cycle’ pattern

0

10

20

30

40

50

60

15 20 25 30 35 40 45 50 55 60 65Age

Pe

r c

en

t s

av

ing

1927-34 1935-44

1945-54 1955-64

1965-75 1975-85

1965-74 cohort: more saving than 1955-64 cohort saving

1975-85 cohort: fewer saving than 1965-74 cohort saving

1935-44 cohort and 1927-34 cohorts equally likely to save

14 Higher income associated with saving (and with saving more)

0

10

20

30

40

50

60

70

80

90

1 2 3 4 5 6 7 8 9 10

Income deciles

PersonFamily unitHousehold

15 Subjective well-being increases saving – whatever the income

Income

quintile

‘Comfort-

able’

‘All right’ ‘Getting

by’

‘Quite

difficult’

‘Very

difficult’

1 low 54 40 24 13 18

2 55 57 44 31 30

3 74 71 53 45 26

4 83 79 67 59 38

5 high 86 76 66 63 [66]

16 Those with pensions more likely to have discretionary savings

0%

10%

20%

30%

40%

50%

60%

1 2 3 4 5

Income group (quintile)

Paying into apersonal pension

No personalpension

Occupationalpension

No occupationalpension

17 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%

18 Patterns of saving (1 = saving)

Wave of survey (1991 .. 2000) N / per cent 1 2 3 4 5 6 7 8 9 10

- - - - - - - - - - 17.7% 1 1 1 1 1 1 1 1 1 1 7.2% 1 - - - - - - - - - 2.0% - - - - - - - - - 1 1.7% - 1 - - - - - - - - 1.3% … many other combinations … 70% - - - - 1 - - - 1 1 1 case

19 ‘Types’ of saver

Per cent Income

variability

(C.V.)

Median

monthly

income

Ever-

social

tenant

Consistent

saver

33% 28% £2500 18%

Consistent

non-saver

53% 37% £1800 71%

Sporadic 13% 33% £2200 11%

20 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.

21 Events linked to starting to save

• Av. Rate among non-savers = 21% p.a.

• ‘very difficult’ financially to ‘comfortably off’: 42%

• FT Student => employee: 38%

• Unem => employee: 31%

• Single => married: 31%

• New family => 23%

• Relatively few events have large effects; most people

don’t start saving even when they happen.

22 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 => divorced/separated: 47%

• Some events usually lead to end to saving

23 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

24 Owe money by BHPS variable age

42

6055

49

33

18

5

0

10

20

30

40

50

60

70

16-24 25-29 30-39 40-49 50-59 60-69 70+

25 Owe money by BHPS variable religion (ioprlg1)

4429

4032

2920

2718

3142

1921

4335

32

0 10 20 30 40 50

None

C of E

Catholic

Ch Scot

Free Presyb

Methodist

Baptist

Congreg/URC

Other Chr denom

Chris no denom

Islam

Hindu

Jewish

Sikh

Other

26 Credit commitments (BHPS/NMG)

1995 2000 2003

Bank

Owe anything, among individuals 36 36 34

Owe anything, among households 50 51

Median amount owed £890 £2,000

Top quarter £2,700 £5,000

Top 10% £5,000 £9,000

Overall: Heavy burden 3 2

Somewhat of a burden 9 9

27 Has arrears on credit or bills[ONS Survey]

13

32

34

35

38

49

0 10 20 30 40 50 60

All

Spent time in institution pre-16

Previous suicide attempt

Agoraphobia

Moderate depression

Moderate/severe alcohol dependence

28 Borrowing tends to persist, with turnover (BHPS 1995 & 2000)

25

14

16

45

Borrower bothyears

1995-only

2000-only

Neither year

29 Borrowing tends to persist, with turnover higher for 20-59 year-olds (BHPS 1995 & 2000)

31

1818

33 Borrower bothyears

1995-only

2000-only

Neither year

30 Arrears also generally short-lived (FACS)

• One family in three (34%) with arrears in one year

didn’t 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).

31 Conclusions

• Considerable change among individuals both with

respect to saving and borrowing

• Patterns with age and income clear, but not

particularly strong