The wealth and saving of UK families on the eve of the crisis

© Institute for Fiscal Studies

The wealth and saving of UK families on the eve of the crisisThomas F. Crossley and Cormac O’DeaInstitute for Fiscal Studies


IFS Retirement Saving Consortium• Association of British

Insurers• Bank of England• Barclays• Chartered Institute of

Personnel and Development

• Department for Work and Pensions

• Financial Services Authority

• HM Revenue and Customs

• HM Treasury• Investment Management

Association• 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


Household Saving Ratio, Annual, 1963 - 2009

0%

2%

4%

6%

8%

10%

12%

14%

Report Figure 1.1, Source: ONS


Household Saving Ratio, Quarterly, 2000-2010

2000

2000

2001

2001

2002

2002

2003

2003

2004

2004

2005

2005

2006

2006

2007

2007

2008

2008

2009

2009

2010

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Source: ONS


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.

Can we look at household saving using microdata?


19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

2006-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%HSR (Nat. Acc.)Expenditure and Food Survey

Year


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 non-mortgage 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:


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 non-mortgage 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:

2000

20002005

IncomeWealthWealth

...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



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

Distribution of Financial Wealth, 2005

Net financial Wealth(£)

10th percentile25th percentileMedian 1,09175th percentile90th percentile

Mean 21,617


Report Table 3.2

Distribution of Financial Wealth, 2005

Net financial Wealth(£)

10th percentile −7,63725th percentile −328Median 1,09175th percentile 16,38390th percentile 58,849

Mean 21,617


Report Table 3.2

Distribution of Financial Wealth, 2005Financial Wealth as a Proportion of Annual Income

Proportion of Families

<−100%<−50% <−25% < 0% <25% <50% <100%

Total




<−100% 3.7%<−50% 7.6%<−25% 12.5%< 0% 27.5%<25% <50% <100%

Total 100.0%




<−100% 3.7%<−50% 7.6%<−25% 12.5%< 0% 27.5%<25% 61.1%<50% <100%

Total 100.0%




<−100% 3.7%<−50% 7.6%<−25% 12.5%< 0% 27.5%<25% 61.1%<50% 69.2%<100% 78.1%

Total 100.0%


Financial Wealth in 2005, Means, by Age


<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+-10,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Age Group

Net

Fin

anci

al W

ealth

– P

er F

amily

(£)

Report Figure 3.1

Financial Wealth in 2005, Means and Medians by Age


<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+-10,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Age Group

Net

Fin

anci

al W

ealth

(£) –

Per

Fam

ily

Mean

Median (p50)

Report Figure 3.1

Financial Wealth in 2005, by Age


<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+-30,000

-10,000

10,000

30,000

50,000

70,000

90,000

110,000

130,000

150,000

Age Group

Net

Fin

anci

al W

ealth

(£) –

Per

Fam

ily

Mean

p90

p75

p50 (Me-dian)

p25

p10

Report Figure 3.1

Financial and Housing Wealth in 2005,by Age


<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Age Group

Net F

inan

cial a

nd H

ousin

g W

ealth

(£) –

Per

Fam

ily

Mean

p90

p75

p50 (Me-dian)

p25

p10

Report Figure 3.2

Financial Wealth in 2005,by Income Decile


Report Figure 3.3

Poorest 2 3 4 5 6 7 8 9 Richest0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Income Decile

Net

Fin

anci

al W

ealth

(£) –

Per

Fam

ily

Mean

p90

p75

p50 (Me-dian)

p25

p10

What happened to the wealth distribution between 2000 and 2005?

Financial Wealth (£)

2000


200510th pct25th pctMedian 737 1,09175th pct90th pct

Mean 14,980 21,617




2000


200510th pct -5,408 -7,63725th pct -335 -328Median 737 1,09175th pct 11,055 16,38390th pct 41,762 58,849

Mean 14,980 21,617


Report Table 3.1



2000


2005

Housing Wealth (£)

2000

Housing Wealth (£)

200510th pct -5,408 -7,637 0 025th pct -335 -328 0 0Median 737 1,091 12,283 60,07075th pct 11,055 16,383 81,730 172,56590th pct 41,762 58,849 172,063 294,889

Mean 14,980 21,617 60,255 115,139


Report Table 3.1

Turning to saving...• A reminder:

– We calculate saving rates between the two years which is:

• We now show median saving rates.


2000

20002005

IncomeWealthWealth

Median Annual Saving Rates, (Financial Wealth), by Age


<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+-1%

0%

1%

2%

3%

4%

5%

6%

Age Group

Med

ian

Savi

ng R

ate

Report Table 5.1

Median Annual Saving Rates, (including Housing Wealth), by Age


<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+-10%

0%

10%

20%

30%

40%

50%

60%

70%

Age Group

Med

ian

Savi

ng R

ate

Report Table 5.2

Median Annual Saving Rates,(Financial Wealth), by Income


Poorest 2 3 4 5 6 7 8 9 Richest-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Income Decile

Med

ian

Savi

ng R

ate

Report Table 5.3

What happens to (liquid wealth) saving rates when you finish paying off a mortgage?


Outright (2000), Outright (2005)

Mortgage (2000), Mortgage (2005)

Renter (2000), Renter (2005)

Mortgage (2000), Outright (2005)

-1%

0%

1%

2%

3%

4%

5%

6%

7%

Housing Tenure

Med

ian

Savi

ng R

ate

Report Table 5.7

Do people treat pension saving and non-pension saving as substitutes?


No Pension (2000), No Pension (2005)

Pension (2000), Pension (2005)

Pension (2000), No Pension

(2005)

No Pension (2000), Pension (2005)

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Pension Payments

Med

ian

Savi

ng R

ate

Report Table 5.5

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


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.


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?



The wealth and saving of UK families on the eve of the crisisThomas F. CrossleyCormac O’Dea

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The wealth and saving of UK families on the eve of the crisis