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This essay discusses two main questions: i) What are the main factors causing many people not to save towards their retirement, comparing men and women age 18 and over; and ii) Look at the differences between the pension system here in the UK and Germany, and what Germany is doing to make people save more than people save than in the UK.
It is clear, across many European countries, that many individuals do not save as much as they could, and, in particular, are not saving adequate amounts towards their retirement. This applies equally for men and women and across many European countries. This problem is, however, particularly marked in the UK, with many individuals either simply not having any pension provisions or not contributing enough in to their pension scheme. In addition, many individuals in the UK simply do not save any proportion of their earnings, and spend as much, if not more, than they earn.
This is not the case in Germany: practically every household saves substantial amounts, right up until old age, with only households in the very lowest proportions of the income distribution curve not saving (Borsch-Supan and Essig, 2003). 40% of households in Germany regularly save a fixed amount, with a further 45% saving, but not fixed amounts and not regularly; 25% of Germans save with a fixed savings target in mind, planning their savings towards these aims, with the majority of Germans preferring to cut household consumption, rather than touch their savings, if ends do not meet; indeed, 80% of Germans seldom go negative in their current accounts (Borsch-Supan and Essig, 2003).
This is quite different to the pattern in the UK, where personal debt is currently the highest it has been for many decades, and many individuals do not plan for saving with distinct aims in mind, nor save towards any sort of pension scheme, leaving themselves open to problems when they come to retirement age. As shown by the OECD (2002), since 1985, the UK has consistently had a far lower household savings rate than Germany, with Germany averaging around 13.5% of disposable household income being saved, year on year since 1985, and the UK averaging around 5.5%, year on year since 1985 (OECD, 2002).
In Germany, as in the UK, there are three main types of pension: state, company and private, with the adoption of private pensions being increasingly encouraged, due to the ageing population in both regions. There are many reasons cited for why people do not save enough towards their retirement, for example, the feeling that ‘I am too young to start saving for my pension’, ‘I don’t earn enough to be able to save for a pension’ or ‘I will get a state pension, so don’t need to worry’. All of these reasons are invalid, if they are studied further, as it is increasingly becoming the responsibility of the individual to provide for their retirement, and so saving for a pension should be a necessary expense; the sooner the individual starts to save, obviously, the more they will have in their pension fund when it comes to retirement age, and the more they will be able to take as a pension when they come to retire. It is thus beneficial for individuals to invest in their future, by saving regularly towards their retirement, but this notion does not seem to be as ingrained in the minds of individuals in the UK as it is in Germany.
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Until recently, 19.5% of incomes from German individuals was generally put towards private pensions, with private pension companies in the UK taking nowhere near this amount; 10-15% is a more normal average amount taken by UK company pension schemes (OECD, 2007). In addition, Germany has one of the highest levels of public spending on pensions in the OECD countries (11.5% of GDP, compared to 4.5% of GDP in the UK (Disney and Johnson, 2001)), although recently Germany has increased the retirement age above the traditional 65 years for men, to 67; a similar rise in the age of retirement from public pension plans has recently occurred in the UK (OECD, 2007). Contribution to private pension plans has the widest coverage in Germany of any OECD country, although the amounts contributed to private pension plans in Germany are low, when compared to the amounts German individuals put in to company pension schemes (OECD, 2007). In addition, fewer German individuals are switching from company pension schemes to private pension schemes in Germany than in other OECD countries. Indeed, only 39.9% of individuals have switched from company to private pension schemes in Germany, with 53.4% of individuals switching to “personal account” pensions in the UK (OECD, 2007). Despite the seemingly high switch over from company pension schemes to private or “personal account” pensions in the UK, the UK government estimates that around 7 million individuals are not saving enough for their retirement, under any scheme, and that an additional 10 million individuals do not save for their retirement via their company pension scheme, which includes an employer contribution of a minimum of 3%.
What are the reasons for these differences, and what are the main factors causing many people not to save towards their retirement? What is Germany doing, for example, that encourages more people to save than in the UK? The UK, traditionally, has higher levels of personal debt than Germany, with individuals from both regions having very different attitudes towards spending and saving, and where they choose to invest their savings. In addition, individuals who do save in the UK tend to ‘dip into’ their savings to buy luxury items, whereas German savers tend to leave their savings alone, and to buy luxury items, only when they can afford to do so, when they have saved, specifically, for that item. Given the ageing population, and the fact that not enough people are saving for their retirement, the UK is currently trying to increase saving towards pensions, particularly, with various tax incentives, through private pension taxation schemes and ISAs, for example, and the newly introduced pension credit schemes.
In conclusion, therefore, there seems to be a very negligent attitude towards saving, in general, in the UK, with saving for retirement being particularly neglected; Germany, on the other hand, with its tradition of low personal debt, and high household savings, has a high coverage of individuals saving towards their retirement, mostly through company, or, increasingly, private pension schemes.
Borsch-Supan, A. and Essig, L. (2003). Household saving in Germany: results of the first SAVE study. National Bureau of Economic Research, Working Paper 9902. Available from http://www.nber.org/papers/w9902 [Accessed 28th October 2008].
Disney, D. and Johnson, M. (2001). Pension systems and retirement incomes across OECD countries. Edward Elgar.
OECD (2002). Household savings rates by country from 1985 through 2004 forecast. OECD Economic Outlook.
OECD (2007). Pensions at a glance – public policies across OECD countries 2007 Edition. Available from http://www.oecd.org/dataoecd/15/42/38728511.pdf [Accessed on 28th October 2008].
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