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Rethinking savings strategies
Rahim Arstall
11 January 2008
  • Photo: Sufi Nawaz
    Sufi Nawaz

    A key focus for European governments in recent years has been the budgetary consequences of an aging population in Europe. Government policy and demographic trends therefore have a direct bearing on career opportunities that will become available as well as the need to re-think savings strategies.

    EU demographic trends

    European Union (EU) demographic trends emphasise the importance of continuing to upgrade skill levels. Although worker mobility brings more competition, there may also be more opportunities if a shrinking workforce leads to higher levels of employment. In addition, there will be opportunities in providing care, health and leisure services to an aging population.

    Photo: Miguel Ugalde
    Miguel Ugalde

    The EU's current total population is approximately 450 million, and because of declining birth rates, is expected to remain at the same level in 2050. The EU Economic Policy Committee has forecast that the working-age population (18 - 64) will drop by 48 million (16%) by 2050. In contrast, the elderly population aged 65+ will rise sharply by 58 million (77 %). Europe will go from having four to only two persons of working age for every elderly citizen. This demographic shift will also lead to an eventual reduction in the working-age population.

    In 2006, two years after the addition of ten new countries to the EU, a record half a million people migrated to the United Kingdom (the majority from Central and Eastern Europe, particularly Poland). According to a recent Bank of England report, many of these migrants are filling temporary vacancies in manufacturing, distribution, hotels, restaurants and construction. The Bank considers migration to and from the country beneficial to the UK economy because it alleviates skills bottlenecks: a situation where there are not enough people to fill jobs in certain skill areas but too many in other domains. The report also highlights the increasing competitiveness of the UK employment market and the continuing importance of qualifications and skills.

    The "diversity" mix in the UK is also likely to rise significantly as over 250 000 British citizens continue to leave each year. In 2006, France adopted a law to more effectively encourage highly-skilled immigration and restrict family immigration. Since 2000, Portugal has experienced increased levels of migration from Brazil and Eastern Europe as well as from former Portuguese colonies.

    Family capital

    Members of the European Jamat will need to plan and prioritise a regular savings strategy early in their career. The aim is to accumulate sufficient family capital to meet rising costs and the increase in life longevity in the face of government trends to remove subsidies for university education and critical care for the elderly.

    It is clear that the costs for old-age care will grow with an aging population. Policymakers are looking at how public costs can be reduced and the responsibility for care shared with individuals. It is forecast that the demand for social care (and not simply healthcare) will rise significantly. The clear trend in Europe is for care in old age to be funded by the individual rather than the State.

    A major concern for all European governments has been the declining ratio of workers to retirees which weakens the government's capacity to fund state pensions (on a “pay as you go” basis). The issue is more acute in France and Portugal, where state pension obligations to retirees are funded largely by the taxes paid by the current generation of workers. Although there have been some pension reforms in France and Portugal, their pensions systems have a much higher level of lifetime employer and employee contributions and consequently higher average pension benefits than the UK. The Pensions Policy Institute has observed that UK contribution levels to pensions have stalled at less than 8% of average earnings. This is considerably lower than guideline levels of savings which suggest that someone beginning to save at age 35 needs to save between 15% and 20% of salary every year until age 65. In France, one concern is the long-term trend towards shorter working lives, due to the later entry of young people into the labour market and increasingly early retirement from the labour market. Only 34% of the 55-65 age group are actually employed in France. In Portugal, the savings rate for individuals has been declining in recent years.

    The London Business School 100-year historical database of equity returns shows that the average investment returns from equities is 5% in real terms (after inflation). The benefit of starting to save early is that the ultimate level of savings is substantially increased by the compounding of investment returns over long periods.

    Photo: Rubinshito
    Rubinshito

    The trend in Europe is for the governments to expect individuals to share the cost of what used to be regarded as public services, such as university education or old-age care. Individuals need to be prudent in saving and budgeting for their family's lifestyle choices. Members of the European Jamat should also be aware of growing employment and business opportunities that will arise from the shrinking working population in Europe.

    In light of these rapid changes occurring within Europe, members of the Jamat are encouraged to consult with professionals and re-evaluate their savings strategies to maintain their family's economic stability.