Lucy Parsons is Senior Economics Researcher at Reform. The full report “Money’s too tight to mention: will the IPOD generation ever trust financial services?” is available at www.reform.co.uk.
David Cameron and George Osborne have for some time highlighted the problem of debt in this country, both public and personal. Reform’s latest report shows that there are some clear policy ideas to be grasped around financial responsibility. Improving the financial capability of the next generation could help start an era of "living within our means" and assist the economic recovery.
The finances of Britain’s young adults are looking as critical as the Government’s. The “IPOD generation” - Insecure, Pressurised, Over-taxed and Debt-ridden 18-34 year olds – have run up huge credit card bills and smashed their piggy banks. The mean debt among young adults is around £6,000, and 60 per cent have either no savings or less than £1,000 worth.
The credit crunch is adding to the financial pressures. New or soon-to-be graduates are wondering if their student debts were worth it as companies cut back on recruitment. Those already on the housing ladder are struggling to meet repayment increases. First-time buyers can no longer get a mortgage six times their salary at a cheap rate.
One of the key causes is that this is all so new to this generation. Britain’s young have grown up in a time of economic growth, easy credit and high consumer expectations. They lack the instinctive fears of previous generations which come from experiencing double-digit inflation, 30 per cent unemployment levels and food rationing. This far less risk averse generation has been happy to use financial products without fully understanding them – nearly half of young people do not know the rate of interest they are charged on their main credit card or overdraft.
The “financial establishment” has failed young people. Banks and financial services are out of touch with young consumers. They are offering advice at a price beyond young people’s means and providing outdated products not suited to their flexible lives.
Government policy (both Labour and Conservative) has compounded the situation. Far from “protecting the consumer”, the heavy increase in regulation since the 1980s has had the unintended consequence of removing the onus on individuals to take responsibility for their own finances. It has also driven up the costs of providing financial advice exponentially, effectively pricing the younger generation out of the financial services market.
Interest rates have been kept excessively low for many years, not reflecting the true cost of capital. This has been a structural problem in the global economy, not just the UK, and has meant that it has been cheap to borrow, and indeed more rational to borrow and spend than to save. Young people in this country have been encouraged to borrow many times more than their salaries to get on the housing ladder.
The introduction of student loans in 1998 has added to this attitudinal shift towards debt. Taking on debt to fund higher education is perceived as beneficial, and as such it has become socially acceptable for someone in their early 20s to start their career with £20,000 or more of debt hanging over their shoulders.
While the current economic shifts feel painful right now, there could be some silver linings. The credit crunch could provide an opportunity to change the way young people manage their finances.
Young adults are far more tech-savvy and informed than older generations – they are potentially more capable of managing their money. They could demand innovative products designed to fit with gap years, sabbaticals and shorter-term jobs. They could use Facebook and other social networking sites to share knowledge on financial matters and create peer ratings for financial advisers. Crucially, young people could place greater value on investing in their own capability and take back responsibility for managing and understanding their finances.
Government and financial services must help them. The day-to-day regulatory burden of financial services could be eased, to reduce costs and encourage innovation. The financial services industry could create more simple, flexible products and build the trust that is missing with this generation. Clear, accessible information is vital.
In this way, financial capability could become an integral part of individuals’ daily lives and a new part of our national debate. Young people could become a generation of saviours, creating innovative solutions to the credit crunch and helping to inaugurate a new period of investment and growth.
