Living on the edge
A generation of twentysomethings are joining the ‘squeezed middle’. But many are unaware how precarious their situation is, argue Richard Darlington and Laura Bradley
The current generation of twentysomethings are feeling a squeeze the like of which their parents have never known. They think they have enough set aside for a rainy day and they are confident of one day owning their own home. But the reality is that if they were made redundant, their money would run out fast and the only way they will get enough cash together for a deposit is to borrow from ‘the bank of mum and dad’.
The scrapping of the education maintenance allowance and steep increases in tuition fees mean that young people face an increasing financial challenge if they wish to pursue their education. While the ‘baby boomers’ benefited from tax-funded and debt-free higher education, were eased onto the housing ladder and built up assets through rising house prices, their children have not been as fortunate. From higher education minister David Willetts’ book The Pinch to Guardian journalist Shiv Malik’s book Jilted Generation, the tale of the contrasting fortunes of the two generations has been well documented.
An early theme in Ed Miliband’s leadership was the idea that what he termed ‘the promise of Britain’ was at risk of being broken. Like the ‘American Dream’ – which promises that hard work and endeavour will be rewarded regardless of background – the ‘promise of Britain’ is the idea that each generation does better than the last. At the same time, the evidence of stalling living standards for the ‘squeezed middle’ suggests that many low-to-middle income households are finding it harder to provide children with the start in life enjoyed by their parents. And there are fears that a perceived ‘live fast, die young’ attitude among twentysomethings is storing up a ‘pensions crisis’, which, when combined with increasing pressures on social care thanks to an ageing population, will force the state to rely on a dwindling taxpaying workforce to subsidise a growing pool of inactive pensioners.
Against the backdrop of these major societal challenges, IPPR commissioned a YouGov poll of people aged 16-29 on below-median incomes (£21,000 a year) in order to investigate their debts, savings and aspirations for the future.
First, we found that there is a huge gap between the extent to which young people think they have enough saved for a rainy day and the reality of what they really have in their bank accounts. Most financial advisers would recommend that people put aside the equivalent of three months’ take-home pay for an emergency. But very few young people have the reserves they would need if they were made redundant.
When asked how long they could make ends meet if they lost their job, more than a quarter (27 per cent) of 16-29-year-olds earning less than £21,000 a year say ‘more than one month but less than three months’. But almost one in five (17 per cent) say they could only make ends meet for less than a month.
This generation is at greater risk than before, with record youth unemployment and the Office for Budget Responsibility predicting that unemployment will continue to rise throughout 2012.
IPPR analysis shows that, of the almost six million young people in the UK living on median incomes or below, close to 2.5 million ‘often worry’ about their ability to meet their monthly costs and 3.5 million say that even if they work hard they will ‘always worry about money’.
As young people go through their twenties, their debts increase. Just over a quarter (26 per cent) of 18-21-year-olds earning less than £21,000 a year say they have no debt at all (including student loans, credit cards, store cards or overdrafts). But less than one in five 22-29-year-olds say they are debt free. There is, of course, nothing wrong with this if those young people are investing in their future, whether by getting a good education or buying a car or season ticket to commute to a better-paid job.
More worryingly, however, many young people have become heavily indebted. More than four out of 10 (42 per cent) of 18-21-year-olds and almost half (49 per cent) of 22-29-year-olds earning less than £21,000 a year say they have combined debts of £5,000 or more. This amounts to around a quarter of their pre-tax annual income.
When asked if they make sure they always have ‘money saved for a rainy day’, almost two-thirds (63 per cent) of 18-21-year-olds on low incomes say they do, a figure which falls to half among 22-29-year-olds. These answers make them sound reasonably prudent, but they are undermined by the reality of their bank balances.
Almost one in five (19 per cent) of 18-21-year-olds earning less than £21,000 a year have no savings at all. The number rises to almost one-third (30 per cent) of 22-29-year-olds in the same income bracket. Just one in five young people on low incomes have £5,000 or more in the bank: 22 per cent of 18-21-year-olds earning less than £21,000 and 19 per cent of 22-29-year-olds. Thus despite saying they have savings for ‘a rainy day’ few have the cash in the bank needed to cushion them against a sudden loss of income or a rise in expenditure.
In the light of this, it seems incredible that just over 3.5 million young people in the UK on low incomes think they will ‘own their own home’. Almost two-thirds (62 per cent) of 16-29-year-olds earning less than £21,000 a year say they believe they will own their own home in the future.
The reality is that homeownership is out of reach for most young people on low incomes, not simply because of a lack of affordable housing, but also because of their inability to save enough for a deposit to secure a mortgage. Without an intergenerational transfer of wealth ahead of inheritance, many of today’s twentysomething will have to rely on the private rented sector until their parents vacate their family homes. Even then, it may be that their parents need their own assets in order to fund their own social care requirements.
It is a bleak picture. But it is one that an active state can have an impact on. At the moment there are few routes for young people on low incomes to accumulate assets of their own. Current incentives to save, like ISAs and higher-rate pension tax relief, are skewed towards people who already have assets.
The cancellation of the Savings Gateway removed one possible savings incentive for people on low incomes and the abolition of the child trust fund means that a saving programme that might have eased the situation for young people in the future no longer exists.
Yet there is strong academic evidence of the effect that having assets can have on the life chances of young people and the way that even a small asset holding can help cushion people against potentially life-changing events. With the Social Fund no longer available for crisis loans, young people are falling back on payday loans and into the hands of legal loan sharks charging APRs of 250 per cent. Payday lenders even target students and young workers with their marketing and advertising campaigns.
Instead, young people are falling back on an increasingly threadbare safety net. The welfare state is only there for young people if they have children of their own. The government should, therefore, explore ways of encouraging young people on low incomes to build up savings. If we want a savings culture, we will need new ways of spreading wealth and helping young people build up their assets.
Richard Darlington is a former special adviser at the Department for Education and is now head of news at IPPR. Laura Bradley is a researcher at IPPR
debt, savings, The Pinch, tuition fees