14 June 2018
Time to be a SKIN
Spend Kids Inheritance Now.
by Frank O’Nomics
Frugality is generally heralded as a virtue. A reluctance to plan for our old age is regarded as one of the biggest threats to our ageing society, as the falling proportion in work are seen as having to support the welfare and healthcare of a retired cohort who are living longer.
There is no doubt that the inability or disinclination to save for retirement by young people is a cause for concern. Too much of their spending is taken up with servicing household debt and their defined contribution pensions are unlikely to be as lucrative as the fast fading defined benefit variety. However, it is the reluctance to spend by the currently retired generation that might be creating some greater, near-term constraints for our economy. Far from blowing our inheritance on cruises and high living, it seems that the elderly are more inclined to hoard their cash rather than spend it. A study released this week by Rowena Crawford at the Institute for Fiscal Studies shows that retired people only spend around 31% of their net wealth in the peak period of their retirement (between the ages of 70 and 90) meaning that they leave the majority of their money to their relatives or (in the form of inheritance tax) to the government. This may sound encouraging, and a demonstration that the new pension freedom legislation has not produced the recklessness feared, but there is a danger that such frugality is both economically inefficient – and may tempt cash strapped governments to tap this pool of wealth.
It is easy to see why people are reluctant to spend large amounts of their wealth in retirement. First, a great deal of it is tied up in their house and so not readily realisable. Some of it can be accessed by “down-sizing” or via equity release schemes but, although 80% of those over 50 own their own homes, less than half move house after that age. Mobility has not been helped by recent increases in the costs of moving. Further, one in six owns a second home and they are not selling those either. This is particularly economically inefficient, given that these assets generate no yield unless they are rented out. Similarly there is a strong inclination to hold on to financial assets, with people preferring to live off their pensions income. All of this may sound very sensible given the high costs of social care, but most will not need it. Essentially, the government has forced people into excessive frugality by the lack of adequate state provision for elderly care.
Consider the benefits of people taking the opposite stance. First, if older people sell their properties more readily it will free up housing, hopefully making family homes more accessible for those who really need the space. Second, there is a huge potential benefit from the multiplier effects of older people spending more money. This may be difficult to generate if people are comfortable and happy living off their pensions, but spending the money is a much better way of redistributing wealth in the economy than bequeathing it to their families, and thereby maintaining inequality.
The concentration of wealth is further exacerbated by the fact that most will finish up leaving their money to children who are at or near retirement themselves – and so similarly reluctant to spend it. The baby boomer generation, who have seen the best employment, biggest capital gains from housing and the most lucrative pensions, will potentially have a great deal of money to leave. The preponderance of such large estates will not be lost on governments looking to control the national debt and to fund welfare spending.
None of this should be used to suggest that the elderly of the UK are relaxing in great luxury. Wealth is held very unequally between older people in the UK. There are a great many pensioners in poverty; with 10% of those aged 55-64 living in households with almost no non-pension wealth, while 5% have non-pension wealth in excess of £1 million. Sometimes research studies, such as the one by the IFS, do nothing more than tell is about the way things are, without suggesting any solutions to the situation. We are not about to change the cautious nature of war babies who cannot escape a tendency to be cautious in their spending habits. Evidence from newer generations of retirees suggests that they too are reluctant to spend their wealth. Given that their wealth is somewhat greater this is significant, particularly as their reluctance to spend may be even more extreme given that many feel the need to retain wealth to help children struggling with mortgages and student debts. There is, however, a strong message concerning social care provision. If the government can make people more comfortable by providing better state facility, older people may be more inclined to spend. This could be a virtuous circle, given that many would not need the care provision anyway and the additional economic growth generated would help to increase the tax take and hence fund that better provision. Similarly, the research suggests that there are unintended consequences from the increase in stamp duty on housing. Releasing financial wealth by buying a cheaper house would be more likely to happen if the transaction costs were not so high. Neither of these suggestions are likely to become policy any time soon, so for now its time to take that round the world cruise – or to at least encourage your parents to do so.
