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Ed Foss, Senior writer
Wednesday, December 1, 2010
Among the thousands of words written about student loans and student debt in recent weeks, not much appears to have been said about the pensions dilemma it looks certain to create for young workers.
We already have a major problem in this country persuading 20 and 30-somethings to start saving towards their retirement. A host of figures is available to explain this challenge, but an easy one is this - only 31pc of 18 to 24-year-olds said they were a member of their workplace pension scheme, according to a National Association of Pension Funds survey.
The two sides of the savings argument, in simplistic terms, are as such.
A 24-year-old starting to pay a mortgage and with a desire to maintain a social life just cannot see the point of putting 8pc, for instance, of their income aside to help them live to a certain standard in their 60s (or 70s if the statutory retirement age continues to climb as expected). It’s too far off to worry about and who trusts the pensions system anyway?
On the other side of the coin, it’s said that a 25-year-old who saves £100 a month for 10 years and then leaves that pot alone until retirement at 65 is as well off as a 35-year-old who saves £100 a month until they are 65 - as long as you assume 5pc annual growth on all monies. Such is the unconfined joy of compound interest.
The problem that must surely be coming is that it will only become harder to persuade the 60pc-plus young people who don’t have a pension to do so when they are faced with even bigger student debt liabilities than currently exist among their slightly older peers.
There will be pressure on their budgets from every direction - pension, mortgage and student debt payoff. And it’s not as if they or their parents have had long to plan for this. Academic fees could be up to the £9,000 cap by 2012.
The numbers surrounding the next wave of student debt may be on a completely different scale, but all the same are beginning to sound as unintelligible as country sized debts. Can a 22-year-old really be expected to get their head around going into a first job and having £50,000 to £80,000 debts as a matter of course?
The repayment threshold may be rising from an annual salary of £15,000 to one of £21,000, but that will only take the pressure off for a short time - while ‘proper’ interest rates simply rack up the massive debt at the same time.
When the repayments kick in, they will be made at 9pc of income.
This column isn’t supposed to be overtly political, but one wonders if enough thought has been given to the effect of nagging young people into saving for a pension at the very same time as taking almost a tenth of their earnings to deal with paying for their degree.
There will be tough choices for the next generation when it comes to this new level of pension versus student debt dilemma. And unless financial education improves for our youngsters, many of those choices will cause further trouble down the line, both for the country and the individuals concerned.