Chapter 6 – Determination of National Income

Savings study points to low-wage setback

http://www.ft.com/cms/s/0/516a40f2-5a0e-11de-b687-00144feabdc0.html

Summary:
Reforms aimed at encouraging people to save for retirement are likely to boost the number of pension contributors but leave low-income earners with small pensions pot, a new report concludes. The Institute for Fiscal Studies report said that as of 2005, around 4.7 million employees were not offered the chance to join an employer's pension scheme. From 2012, when the reforms come into effect, they will be able to sign up to a pension through the newly created Personal Accounts scheme. Some pension experts have warned that the new rules are likely to lead to lower levels of pension savings because most employers, who currently offer more generous terms than those set as the minimum, would reduce them.

Saving:
On the economy, saving has both a positive and a negative impact. On the positive side, savings provide a pool of money that can be lent for investment. Most Canadian put their savings in the bank, and the bank lends out the money to businesses. The larger the available pool of money, the lower the interest rate. As a result, when Canadians save, they are helping to lower the interest rates. Negatively, saving is the opposite of consumption. Canadians are not spending when they save, and when they are not spending, they are not creating employment opportunities. Private saving in Canada is approximately 15% of GDP.

Reflection:
The article states that, “The legislation will require all employers automatically to enroll workers in a savings scheme and contribute up to 3 per cent of referenced earnings.” In the words of Ros Altmann, an economist, “The risk is that you encourage employers to 'level down’”. I think that it is generally a good idea for everyone to save money but at the same time spend some of it to promote a growth in the consumption of an economy. The IFS researchers also found those least likely to save were low-wage workers with a median income of £14,000, compared with a median of £21,600 among those who are saving.