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«September 2007 International Longevity Centre - UK The International Longevity Centre - UK (ILCUK) is an independent, non-partisan ...»

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• Prioritise financial advice and financial capability Given that the average debt of younger households has increased, and many confront a lifetime characterised by a volume of debt of a magnitude unknown to previous cohorts, this increases the importance of younger people making good financial decisions at every opportunity. Given evidence of low levels of ‘financial capability’ in the UK 13, this underlines the importance of the availability of good financial advice. Policy and research in this field remains critically important; for example, the Thoresen Review into generic financial advice 14.

In addition to financial advice, financial capability must remain a key focus of public policy, as set out by the Government 15. As individuals confront the management of more debt over a longer portion of their lives, good financial education is vital.

Policymakers must continue to encourage financial education of the young 16.

• Adapt decumulation policy to the increasing role of property in household asset portfolios Average household mortgage debt has grown in value significantly among younger cohorts. The Government has recognised that different forms of asset accumulation, such as property paid for with a mortgage can represent a form of retirement saving.

However, the money used by households to repay increasingly large mortgages cannot be used to pay into a pension or other savings vehicles; retirement saving in the form of property may thus be at the expense of retirement saving in other forms.

This means that almost by default, much of the younger population is being forced to use property as a form of retirement saving, potentially at the expense of other more flexible and suitable retirement saving vehicles, such as pensions. Different forms of retirement saving are not interchangeable in terms of their suitability for providing retirement income. Over the last decade, trends in life course asset accumulation have become skewed away from pensions toward property, despite the clear advantages that pensions have as a source of retirement income. This increases the urgency with which policymakers and the financial industry must address the challenge of ‘decumulation policy’ - set out more in detail in the penultimate section of this report - to respond to the fact that the ‘retirement savings’ of the young will increasingly be tied up in illiquid property assets. In particular, if the asset accumulation of younger cohorts is to be skewed toward property, it suggests that these cohorts must be able to generate an income from these property assets upon retirement; something which today’s older cohorts are failing to do.

• Monitor how living in debt affects the choices and behaviour of younger cohorts Asset accumulation is not an independent process within a person’s life, but is deeply enmeshed and intertwined in the decisions and choices they make. Life choices affect asset accumulation and asset accumulation affects life choices.

As the average size of household debt possessed by younger cohorts has grown, relatively little is known about how this may impact upon the choices and actions of these individuals. It is important to consider both the effect on younger cohorts currently, but also the effect on the expectations of future cohorts, for example, how the expectation by a 20-year old of a large mortgage at the age of 30 will affect current choices and decisions. This applies to 20-year olds now and to those who will be aged 20 a decade from now.

It might be presumed that younger individuals would increase saving in response to rising debt levels. However, this relationship is not clear. For example, research has shown that consumption among the young is most affected by swings in house-price inflation, suggesting that the positive economic conditions that lead to rising house See Atkinson A et al. (2006) See http://www.hm-treasury.gov.uk/independent_reviews/thoresen_review/thoresenreview_index.cfm See HM Treasury (2007).

Multiple policy initiatives are emerging in this field. For example, pfeg - an educational charity - has, with the support of the Financial Services Authority, launched ‘Learning Money Matters’, which seeks to provide a comprehensive range of resources for providing financial education in schools.

prices also affect younger people’s expectations about future income, and hence decisions on how much they can afford to spend and save 17.

This means the Government must pay close attention to how younger cohorts respond to changing patterns of assets and debt, especially in the light of inevitable changes in the economic cycle, or potential stagnation or falls in house-prices. The ‘debt-burden’ on younger cohorts may not significantly affect their behaviour while their expectations are of continued income and asset growth. However, if these expectations change in response to lower or negative economic growth, this debtburden may influence detrimentally the choices and behaviour of younger cohorts.

More generally, the Government must monitor the effect of debt on the behaviour of younger cohorts. Actual or expected debt, which is of a higher magnitude than that experienced by previous cohorts, may affect important decisions involving productive risks. An important example is decisions surrounding the personal investments that individuals are willing to make in their education and skills. It could be anticipated that, depending on individual income and employment expectations, increasing actual or expected debt in early adulthood may reduce investment in such ‘human capital’, particularly as a result of lower tolerance for the risks involved in personal investments in education. This has implications right across the economy, particularly in light of the ‘skills gap’ identified by the Leitch Review 18.

Alternatively, it may be that expected or actual debt will influence career decisions.

Individuals may gravitate toward higher paying sectors, such as finance, at the expense of lower paid sectors, such as engineering. Although such an effect represents the functioning of the labour market, there are nevertheless significant implications for the economy, as key sectors may experiences shortages in particular or specialised skills. Increasing actual or expected debt will affect, and ultimately change, how individuals evaluate the risks and rewards associated with different careers 19.

The changes identified by Asset Accumulation across the Life Course have important implications for individuals. Policymakers must monitor carefully how different cohorts respond, and explore appropriate policy responses. However, of even more urgent interest to society and policymakers is the impact that relative financial circumstances, increasing debt-holdings, changing expectations and the challenges to owning a home may have on decisions around family formation.

See Attanasio O et al. (2005) See Leitch (2006) For example, the non-financial rewards associated with lower-paid public sector jobs, such as teaching, will change in their relative perceived value to individuals who expect to have difficulty in affording their own home.

Asset Accumulation and Family Formation

Among the numerous factors that determine the decision to start a family, a household’s financial situation and relative economic security can play a critical role.

What has happened to the typical financial position of those around the peak age for family formation, and what does this mean for public policy?

Background The decision to start a family is both highly complex and personal. Many factors are involved, including age, strength of relationship and employment situation. Expectations are also important, such as future income and health status.

Trends in family formation over recent decades demonstrate two characteristics. First, the average age for women to have their first child has increased. In 2005, the mean age of women having their first birth was 27.3 years; a rise of 3.6 years from 1970 (Source: ONS).

Second, the total fertility rate (TFR), i.e., the number of children born per woman has declined in the long-term. In 2005, the TFR was 1.79 children per woman. This was above the low of

1.63 in 2001, but well below the 1960s peak of 2.95 children per woman in 1964 (Source:

ONS). Most importantly, it is also below the population ‘replacement rate’ of around 2.1 children per woman. This trend has been a major contribution to the ageing of UK society.

Indeed, the ‘elderly support ratio’ - the population of working age divided by population of pensionable age - is projected to fall from 3.35 in 2002 to 2.53 in 2031 (Source: Government Actuaries Department: 2003).

Although starting a family is a highly personal decision, society - and therefore the Government - has an enormous interest in this decision. Changes in the UK ‘elderly support ratio’ have already contributed to major policy upheavals, such as the need to increase the state pension age. Quite besides wider social policy and normative considerations, demographic change gives the Government a keen interest in creating conditions favourable to child-rearing. This is reflected in efforts by the Government to implement ‘family-friendly’ policies, such as extending statutory rights to maternity and paternity leave, flexible working, and tax relief for childcare.

Among the factors affecting the decision to start a family, financial circumstances are highly important. Raising a child is enormously expensive in terms of both outgoings on clothing and food, as well as the income that individuals forego when they reduce their level of activity in the labour market or change the nature of their paid work in order to balance the responsibilities and work involved in child-rearing and paid employment.

Various aspects of a household’s wealth and finances will affect the decision to start a family, including income, volume of assets and debt, and whether a household occupies rented accommodation or is an owner-occupier. These factors will also affect further decisions about child-rearing such as using child-care.

Asset Accumulation across the Life Course

Analysis shows a number of significant changes in the wealth and economic circumstances of households around the peak age for starting a family. Individuals around this age in 2005 typically had less household liquid assets than those of a similar age in 1995, providing less cushioning against unexpected expenditure ‘shocks’ associated with starting a family and child-rearing, and potentially creating a greater reliance on debt. In particular, individuals in the critical 25-34 age-group on average had net household liquid assets of £4000 in 1995. In 2005, the equivalent figure for individuals in this age-range was £430.

The household net illiquid assets of owner-occupiers in the 25-34 age range have increased dramatically. In 1995, an individual in this age-range had household net illiquid assets of £12,000. A decade later, the equivalent figure for the 25-34 age range was £50,000.

However, this was matched by an increase in the mortgage debt for owner-occupiers in this age-range. In 1995, average household mortgage debt was £50,000; in 2005, the equivalent figure was £94,000. Average household illiquid wealth and mortgage debt in the age-ranges above and below saw similar changes.

The Challenge

Financial security is a significant factor influencing the decision to start a family. Although the effect that household finances have on this decision will be mediated by changing expectations among different cohorts and adaptation to circumstances, it can be expected that a worsening financial situation, both in real terms, but also relative to previous cohorts, might act as a deterrent to family formation.

The UK Government has gone further than ever before to extend ‘family-friendly’ policies in recent years, imposing significant costs on employers through regulations relating to parental rights. However, trends in asset accumulation risk undermining such policies. The Government must reduce this risk by exploring what policies could lessen the deterrent effect of the actual and expected increases in household debt on those around the peak-age for family formation.


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