It is worth saving any more?

01/09/2009 by Steve Barclay.

Visit an elderly relative who has just gone into residential care.  He is paying £540 a week for his single room with space for his thin bed, one armchair, a sink in the corner and not much else.  Along the corridor are identical rooms where other residents pay nothing.  His mistake is to have lived within his means and saved over the years.  He is now paying over £2,000 a month from his life savings whilst those who spent their money and did not save get the same care and facilities for free. How can this be fair?

At his first Labour Conference as Prime Minister in 1997 Tony Blair promised to act.  In 1999 they appointed a Royal Commission.  Dither and delay then continued with a Green Paper, followed by a public consultation. After 13 years in power the Government is no further forward. Yet this issue is not going to go away.  Forecasters say that in the next two decades a quarter of the UK population will be over 65, with those over 85 expected to double.  There is no painless solution but the next Government will need to act.  As with the news today that electricity blackouts are forecast in a Government report within the next 8 years, it is clear the current Government will not take the tough decisions on key long term issues.

Those saving who are some years away from residential care also risk losing out unfairly from the current Government’s approach.  Labour is borrowing £500 million a day (in 1997 we borrowed all year what this Government is borrowing every 2 days) and paying for it by printing money.  Working out when to stop printing money will not be straight forward.  The Government’s biggest concern will no doubt be deflation - if the debt is big now then deflation would make it worse.  Yet this makes it more likely that money will be printed for too long, igniting inflation.  Inflation might help reduce the Governnment’s, companies and individual debt, but for pensioners living on their savings it will be devastating.  We should not underestimate how painful inflation can be and the hardship it causes.  Nor once started is it painless or popular to cure - it was inflation that drove the last Conservative Government to join the ERM.

So should children save?  After all, today is the day the first generation of children receive the Government’s top up to their Child Trust Funds (£500 to children if neither parent works and both claim benefit, but £250 to children where both parents work).  Estimates say that the Child Trust Funds for some children will be worth £10K when they are 18 years old.  These same children will have to pay back all this money plus interest in the form of higher tax (the money they receive today is borrowed from the next generation which is them) and those who go to university are receiving money to pay for future tuition fees i.e. what used to be free. Both schemes provide jobs for administators to deal with the paperwork, also paid for with money borrowed from the same children’s future tax bills. 

The consequences of the massive expansion of means testing under Gordon Brown as Chancellor and now Prime Minister is that more people will look to spend rather than save. It is no different to what their Government has done in not putting money aside in the boom years. And to think Gordon Brown used to talk about prudence.  A priority for the next Government must be to try to re-build a culture of saving, but it will not be easy.  The message risks being wiped out by the bills being run up today.

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