A2 Macroeconomics: Q: What is a savings gap?

A: there are two kinds.

In less developed countries we see investment savings gaps. Many households do not have enough money to support themselves, let alone save. This means too little money is available for investment in their capital stock which will then deteriorate over time, causing productivity to fall. More and more goods are imported, and the balance of payments deteriorates.

In developed countries including the UK, many households have pensions savings gaps. This means that instead of sacrificing some spending power now by saving, most of households' disposable income is spent on consumption. Once retirement age arrives, these households see such a large drop in income that they may face relative poverty. This lack of savings is exacerbated by "population issues".

In the UK, a savings gap of £300 bn, or £10,000 per worker per year has been identified. This short article from the Guardian highlights the fact that people are not saving enough.

The Department for Work & Pensions is the government department responsible for passing laws on pensions savings. It has had 9 different Secretaries of State in 8 years - leading to people being confused about how to save. A risk is that the private companies that manage the savings could collapse. For example, in 1999 the pensions company Equitable life went into receivership, but none of the £4.8 billion that Equitable pensions holders had saved, have been paid back. The video below sums up this case.

To make matters worse, a recent report calculates that up to 40% of savers' money are swallowed up by UK investment companies that manage the pensions - x inefficiency at work! Here is the article.