The wealth and saving of UK families on the eve of the crisis Thomas F. Crossley and Cormac O’Dea Institute for Fiscal Studies © Institute for Fiscal Studies IFS Retirement Saving Consortium • Association of British Insurers • HM Revenue and Customs • Bank of England • Investment Management Association • Barclays • Chartered Institute of Personnel and Development • Department for Work and Pensions • Financial Services Authority © Institute for Fiscal Studies • HM Treasury • Pensions Regulator • Personal Accounts Delivery Authority • Scottish Widows • The Actuarial Profession Motivation for this research: Where to look to study Household Saving? • Most high profile measure of Household Saving is the ONS Household Saving Ratio, released quarterly. – This is a measure of the total saving undertaken in the economy © Institute for Fiscal Studies Household Saving Ratio, Annual, 1963 - 2009 14% 12% 10% 8% 6% 4% 2% 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 0% Report Figure 1.1, Source: ONS © Institute for Fiscal Studies Source: ONS © Institute for Fiscal Studies 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% 2000 Household Saving Ratio, Quarterly, 2000-2010 Household Saving Ratio • The most high profile measure of Household Saving is the ONS Household Saving Ratio, released quarterly. • This is a measure of the total saving undertaken in the economy – A useful summary of the total volume of saving being done in the economy. • But we would caution against relying on it for questions related to the adequacy of wealth for retirement – It is dominated by the saving of the those with the greatest income. – Contains limited information about trends in saving among those with low and middle incomes. – An economy-wide average: contains no information on distributional questions such as who saves and who doesn’t. – Measured with a great deal of uncertainty • Calculated as the difference between two large aggregates, themselves measured with error. © Institute for Fiscal Studies Can we look at household saving using microdata? 16% 14% 12% HSR (Nat. Acc.) Expenditure and Food Survey 10% 8% 6% 4% 2% 0% -2% Year © Institute for Fiscal Studies In the report, using the British Household Panel Survey, we calculate two measures of wealth... • Liquid Financial Wealth – Balances in savings accounts plus bonds/equities less nonmortgage debt • Financial and Housing Wealth – Liquid Financial Wealth plus value of housing less outstanding mortgage debt • Use these measures to: – Calculate saving rates between the two years which is: © Institute for Fiscal Studies In the report, using the British Household Panel Survey, we calculate two measures of wealth... • Liquid Financial Wealth – Balances in savings accounts plus bonds/equities less nonmortgage debt • Financial and Housing Wealth – Liquid Financial Wealth plus value of housing less outstanding mortgage debt • Use these measures to: – Calculate saving rates between the two years which is: Wealth2005 Wealth2000 Income2000 © Institute for Fiscal Studies ...and summarise the distribution of wealth and saving according to household type • We define family groups according to: – Age, Income, Family Type, Housing Tenure, Pension Payments – Summarise the distribution of wealth and saving for each group • Family level analysis – A family is defined as a single adult or couple with any dependent children • What important assets are we missing from the data? – Cash and current account balances – Pension Wealth © Institute for Fiscal Studies The rest of this presentation.... • Summary of wealth distribution in 2005 – Illustrate patterns by age, income • Summary of saving behaviour between 2000 and 2005 – Again, illustrate patterns by age, income – Dramatic differences in saving rate depending on whether changes in housing equity are included in saving or not © Institute for Fiscal Studies Distribution of Financial Wealth, 2005 Net financial Wealth (£) 10th percentile 25th percentile Median 1,091 75th percentile 90th percentile Mean Report Table 3.2 © Institute for Fiscal Studies 21,617 Distribution of Financial Wealth, 2005 Net financial Wealth (£) 10th percentile −7,637 25th percentile −328 Median 1,091 75th percentile 16,383 90th percentile 58,849 Mean 21,617 Report Table 3.2 © Institute for Fiscal Studies Distribution of Financial Wealth, 2005 Financial Wealth as a Proportion of Annual Income <−100% <−50% <−25% < 0% <25% <50% <100% Total © Institute for Fiscal Studies Proportion of Families Distribution of Financial Wealth, 2005 Financial Wealth as a Proportion of Annual Income <−100% Proportion of Families 3.7% <−50% 7.6% <−25% 12.5% < 0% 27.5% <25% <50% <100% Total © Institute for Fiscal Studies 100.0% Distribution of Financial Wealth, 2005 Financial Wealth as a Proportion of Annual Income <−100% Proportion of Families 3.7% <−50% 7.6% <−25% 12.5% < 0% 27.5% <25% 61.1% <50% <100% Total © Institute for Fiscal Studies 100.0% Distribution of Financial Wealth, 2005 Financial Wealth as a Proportion of Annual Income <−100% Proportion of Families 3.7% <−50% 7.6% <−25% 12.5% < 0% 27.5% <25% 61.1% <50% 69.2% <100% 78.1% Total 100.0% © Institute for Fiscal Studies Financial Wealth in 2005, Means, by Age 80,000 Net Financial Wealth – Per Family (£) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 -10,000 <25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 Age Group Report Figure 3.1 © Institute for Fiscal Studies 75+ Financial Wealth in 2005, Means and Medians by Age 80,000 Net Financial Wealth (£) – Per Family 70,000 Mean 60,000 Median (p50) 50,000 40,000 30,000 20,000 10,000 0 -10,000 <25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 Report Figure 3.1 © Institute for Fiscal Studies Age Group 75+ Financial Wealth in 2005, by Age Net Financial Wealth (£) – Per Family 150,000 130,000 Mean 110,000 p90 p75 90,000 p50 (Median) 70,000 p25 50,000 p10 30,000 10,000 -10,000 -30,000 <25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 Age Group Report Figure 3.1 © Institute for Fiscal Studies 75+ Financial and Housing Wealth in 2005, by Age Net Financial and Housing Wealth (£) – Per Family 700,000 Mean 600,000 p90 p75 500,000 p50 (Median) 400,000 p25 p10 300,000 200,000 100,000 0 <25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 -100,000 Report Figure 3.2 © Institute for Fiscal Studies Age Group 75+ Financial Wealth in 2005, by Income Decile Net Financial Wealth (£) – Per Family 100,000 Mean 80,000 p90 p75 60,000 p50 (Median) p25 40,000 p10 20,000 0 -20,000 Poorest 2 3 Report Figure 3.3 © Institute for Fiscal Studies 4 5 6 Income Decile 7 8 9 Richest What happened to the wealth distribution between 2000 and 2005? Financial Wealth (£) 2000 Financial Wealth (£) 2005 737 1,091 14,980 21,617 10th pct 25th pct Median 75th pct 90th pct Mean © Institute for Fiscal Studies What happened to the wealth distribution between 2000 and 2005? Financial Wealth (£) 2000 Financial Wealth (£) 2005 10th pct -5,408 -7,637 25th pct -335 -328 Median 737 1,091 75th pct 11,055 16,383 90th pct 41,762 58,849 Mean 14,980 21,617 Report Table 3.1 © Institute for Fiscal Studies What happened to the wealth distribution between 2000 and 2005? Financial Wealth (£) 2000 Financial Wealth (£) 2005 Housing Wealth (£) 2000 Housing Wealth (£) 2005 10th pct -5,408 -7,637 0 0 25th pct -335 -328 0 0 Median 737 1,091 12,283 60,070 75th pct 11,055 16,383 81,730 172,565 90th pct 41,762 58,849 172,063 294,889 Mean 14,980 21,617 60,255 115,139 Report Table 3.1 © Institute for Fiscal Studies Turning to saving... • A reminder: – We calculate saving rates between the two years which is: Wealth2005 Wealth2000 Income2000 • We now show median saving rates. © Institute for Fiscal Studies Median Annual Saving Rates, (Financial Wealth), by Age 6% Median Saving Rate 5% 4% 3% 2% 1% 0% -1% <25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 Age Group Report Table 5.1 © Institute for Fiscal Studies 75+ Median Annual Saving Rates, (including Housing Wealth), by Age 70% 60% Median Saving Rate 50% 40% 30% 20% 10% 0% -10% <25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 Age Group Report Table 5.2 © Institute for Fiscal Studies 75+ Median Annual Saving Rates, (Financial Wealth), by Income 4.0% 3.5% Median Saving Rate 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% Poorest 2 Report Table 5.3 © Institute for Fiscal Studies 3 4 5 6 Income Decile 7 8 9 Richest What happens to (liquid wealth) saving rates when you finish paying off a mortgage? 7% 6% Median Saving Rate 5% 4% 3% 2% 1% 0% -1% Outright (2000), Outright (2005) Report Table 5.7 © Institute for Fiscal Studies Mortgage (2000), Renter (2000), Mortgage (2005) Renter (2005) Housing Tenure Mortgage (2000), Outright (2005) Do people treat pension saving and nonpension saving as substitutes? 3.5% 3.0% Median Saving Rate 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% No Pension (2000), No Pension (2005) Report Table 5.5 © Institute for Fiscal Studies Pension (2000), Pension (2005) Pension (2000), No Pension (2000), No Pension (2005) Pension (2005) Pension Payments Summary – Wealth Distribution • Wealth is distributed unequally throughout the population – In 2005, many families had no or little liquid wealth – Mean wealth is substantially higher than median wealth – Median financial wealth was very close to zero (<£500) for families headed by anyone under the age 45. • The patterns according to socio-economic characteristics are largely as expected: – Financial wealth rises with age (except at the very oldest ages) – Financial wealth rises with current income © Institute for Fiscal Studies Summary – Liquid Saving 2000 to 2005 • There was very little net saving of liquid financial wealth between the two years: – Real median family wealth increased from approx. £750 to approx. £1,100. • Passive accumulation of increases in housing equity swamped accumulation of more liquid forms of wealth. • Saving in terms of liquid wealth between 2000 and 2005 was highest for those aged between 55 and 59. • Younger and poorer families had particularly low rates of saving between 2000 and 2005. © Institute for Fiscal Studies Other related research underway or planned at the IFS... • What has been the effect of the financial crisis on household wealth and saving? • Distribution of retirement resources among the oldest households (updating of previous work that summarised the distribution in 2002) • Estimation of discount rates implied by earnings histories and wealth data • To what extent is private pension coverage affected by up-front financial incentives to save? © Institute for Fiscal Studies The wealth and saving of UK families on the eve of the crisis Thomas F. Crossley Cormac O’Dea © Institute for Fiscal Studies