Pensions policy and the recession
1. Retirement provision requires a balance between pensions financed by individual saving and pensions paid by the state from taxes and insurance contributions collected from people of working age. The balance to be struck has to reflect the extent to which it is fair to expect future generations to support the current population in old age as against the fact that people of modest means are likely to find saving for retirement very difficult. 2. The Government's policy approach has been based on the view that, for behavioural reasons, individual retirement saving is best facilitated through automatic enrolment into incentivised pension schemes which prevent people having access to their retirement saving until they reach retirement. The Government takes the view that, in order to maintain a fair balance, pension saving should be encouraged and enabled 3. Policy-makers are probably more concerned than households about the burden that some mechanisms for financing retirement impose on future generations. Indeed some households may not fully recognise the implications for their successors of some forms of finance. 4. This means that an overall assessment of whether the nation is saving enough for its changing population structure may give an answer different to that obtained from the question whether and how far existing households have resources adequate to finance their own old age. 5. Capital gains on housing amount to a transfer of resources to existing home-owners from future generations which do not yet own homes and some of the econometric evidence on household behaviour suggests that these gains do affect consumption; they would not do so if households wanted to take full account of the impact of them on their descendents. 6. Savings rates including capital gains have been very high recently. On the other hand savings rates excluding capital gains but taking account of saving by businesses and by the government (both of which contribute to the resources available to address an ageing population) have been low in the last twenty years, both by comparison with earlier periods and relative to other advanced countries. 7. This suggests that policies to raise savings rates are very timely. 8. However, an argument is frequently put forward that, during a recession, the economy can be supported by promoting consumption rather than saving. This raises the question whether the Government's policies of facilitating retirement saving are misplaced. 9. This study concludes that the country's long-term history of …
Consumption, employment uncertainty, and capital losses
From a household point of view the two major changes associated with the economic disruption of the last eighteen months are, first, that the unemployment rate and presumably the risk of unemployment have risen sharply, and secondly, that there have been large declines in asset prices. It is obviously not possible to say how far either of these changes is permanent, but there is a risk that steady state unemployment may increase, at least for a substantial period of time. Equally, given that asset prices in 2007 were unusually high, it seems most unlikely that they will rapidly recover to the levels of two years ago. This study explores the implications of these two changes for household behaviour. The analysis is conducted using the National Institute Benefit and Tax Model (NIBAX) made available to the Department for Work and Pensions and HM Revenue and Customs. NIBAX is a simulation model of household behaviour, which operates on the assumption that households plan for the future. This planning is considered to take account of the framework of taxes and benefits that exists, in the light of practical considerations regarding the uncertainty of the future, and the importance of credit constraints. Thus the results tell us how people would behave if they did understand their economic environment and planed rationally for an uncertain future. The structure of this paper is as follows. First, we provide an outline description of the NIBAX model. We then discuss the simulation framework and present simulation results. It turns out that the effects of capital losses depend very much on whether labour supply is exogenous and this is illustrated. Finally conclusions are drawn.
Project on consumption and saving for the DWP - comparative analysis of consumption and saving in the UK and US
In this note we compare consumption behaviour in the US and the UK with a special focus on the scale of, and differences in, the impacts of changes in income, financial and housing wealth, both over time and between countries. It is common to claim that theory tells us housing wealth is not wealth, and hence it should not impact on consumption. We investigate these issues first by searching for patterns of cointegration and causality between consumption, income and wealth in the UK and the US. Using these results we investigate the effects of changes in asset prices on consumption in the UK and the US using the National Institute Global Model, NiGEM under different sets of assumptions. A temporary 10 percent fall in the price of houses will in both countries increase the savings ratio by around 1 percentage point, with the effect being marginally larger in the UK than the US. It is relatively clear from the data, but not from theory, that a permanent change in real house prices will have a similar effect on the saving ratio. Hence a 30 per cent fall in real house prices in either country would raise saving by around 1_ percentage points. The effects of a fall in equity prices of a similar magnitude would have about a sixth of the effects, as we would expect from estimated equations.