Cost-of-living crisis risks young savers’ future retirement outcomes

With current contribution rates stagnated around the minimum rate, today’s young savers are unlikely to accrue sufficient savings to achieve positive retirement outcomes and with the current cost-of-living crisis having a particularly negative impact on young savers, it is unclear how their outlook can be improved.

Young people are disproportionately impacted by the cost-of-living crisis. They are more likely to:

• Be unemployed or in precarious work: 12.7 per cent of 16-24 years olds were unemployed in May-July 2023, compared to 4.3% of the total population over 16

• Rent privately: 46 per cent of 16-34 year olds, compared to 21 per cent of all adults; private rental prices paid by renters, many of whom are young people, rose by more than 5 per cent in the 12 months to July 2023, with 16-24 year olds spending an average 47 per cent of their gross income on rent

• Have characteristics of financial vulnerability: 29 per cent of 16-24 year olds and 31% of 25-34 year olds have low financial resilience, compared to 24 per cent across the whole adult population.

These inequalities have the potential to have a significant negative impact on young people, both in terms of immediate financial wellbeing and future retirement outcomes.

While automatic enrolment has created a positive upward trend in participation, average low levels of contributions mean that most young savers are not on track to achieve positive retirement outcomes without significant changes to saving behaviour or policy, and the cost-of-living crisis presents challenges to either option.

The latest edition of PPI’s DC Future Book highlighted just how bleak the retirement outlook may be for many young savers’.

Someone currently aged 22, contributing eight per cent of median earnings through working life, could meet the PLSA’s moderate retirement living standard (RLS) for 12 years (around half of retirement on average) or the comfortable RLS for just 4 years (around a sixth of retirement). This means that future pensioners may have to choose between adequacy for a short time or an income that lasts longer (sustainability) but pays out at a lower level.

The risk faced by future retirees is compounded by demographic, economic and policy changes that mean they will need higher saving levels to achieve similar living standards to current retirees.

Mortgage rates and home ownership

Longer life expectancies mean that savings will have to be spread across a longer retirement period, unless working lives can be extended, and lower levels of home ownership are likely to lead to higher housing costs in retirement for future generations.

The cost-of-living crisis, coupled with higher mortgage rates, is making the goal of home-ownership even more inaccessible for many young people.

Encouraging young savers to increase their contributions is an uphill battle at the best of times, but in the face of current cost-of-living pressures it is even more challenging.

A survey of 2,000 UK adults, conducted in April 2022 for Wealth at work, found that half of 18-34 year olds said they have reduced or stopped any regular savings as a result of cost-of-living pressures, compared to 42 per cent of all adults and 32 per cent of people aged 55 and over.

Many young savers will find it challenging to increase their pension contributions on current wages, with the cost of essentials increasing. Others may be in a more fortunate position where increased saving would be possible, but it is unlikely to be their top priority with the cost of basic needs growing.

Helping young people save more towards their pension

There are other policy options available to potentially increase young people’s pension savings, such as changes to tax relief or an increase in minimum employer contributions. However, as with any policy, there are trade-offs, with the key consideration here being cost, at a time when both government and employers are also facing financial challenges.

Three quarters of young people expect that their retirement experience will be worse than previous generations’, including almost half who think it will be significantly worse.

Given the challenges faced by young savers, this seems inevitable without some significant changes.

While the current economic landscape makes these changes more challenging to implement, it is clear that young savers will need more support to achieve positive retirement outcomes.

Lauren Wilkinson, is senior policy researcher at the Pensions Policy Institute