Who will ‘Help to Save’ help to save?

Published on 15 August 2016

The 2016 Budget included a policy designed to help low-income working families, known as ‘Help to Save’. This observation examines whether the policy is likely to help those who are not currently saving enough and to encourage them to save more, or is instead an opportunity for those who already have savings (or would save anyway) to receive a government subsidy.

The 2016 Budget included a policy designed to encourage around 3.5 million individuals in low-income working families to save more, known as ‘Help to Save’. From April 2018, those in families claiming working tax credit and in working families in receipt of universal credit (except those with very low earnings) will be able to place up to £50 a month in a new savings vehicle. The government will add 50% to those contributions after two years, and then do the same for another two years’ contributions, meaning a maximum government top-up of £1,200 for those who build up the full £2,400 of contributions to an account. Both members of a couple are able to have an account, so a couple that placed £4,800 in an account over two years would receive a total match of £2,400. However, the government expects the policy to cost only £70m in 2020–21, implying an average government top-up of only £20 in that year per eligible individual.

The previous Prime Minister, David Cameron, explained that the rationale for the scheme was to help low-income families build up a ‘rainy day fund’ – a buffer stock of savings that enables them to deal better with unexpected changes in income or expenditure. But the Figure shows that, of those individuals who would be eligible for ‘Help to Save’ were it in place now:

  • 20% live in a household that already has savings (excluding pension and housing wealth) of over £2,000;
  • 44% live in a household that already saves at least £10 a month;
  • 30% live in a household that already reports being able to afford an unexpected expense of £750.

In fact, just over half (53%) of the eligible group meet at least one of these three criteria. For them, the introduction of ‘Help to Save’ is arguably unnecessary to achieve the stated aim of the policy (to build up an adequate ‘buffer stock’ of savings), and for many will represent an opportunity to receive a government subsidy for savings that already exist or that would have been put aside in any case.

One could restrict eligibility to renters, on the basis that owner-occupiers (who make up nearly half of the eligible group) are much more likely to already have a ‘rainy day fund’. Of eligible individuals in rented accommodation, 10% are in households with at least £2,000 of savings, 35% are in households already saving at least £10 a month, and 16% are in households that report they could afford an unexpected expense of £750. 60% of eligible renters meet none of those three criteria (compared to 31% of eligible owner-occupiers).

Another way of targeting the policy more precisely at those without a ‘rainy day fund’ would be to make a lack of existing savings a condition of eligibility, by introducing an asset test. The (recently closed) government consultation on Help to Save states that the government is considering restricting eligibility to those with less than £2,000 of savings. If one excludes those in households with more than £2,000 of savings in financial assets, the proportion of eligible individuals whose household already saves £10 a month falls to 36%, and the proportion in households who could already afford an unexpected expense of £750 falls to 19%. 60% meet neither criterion, compared to 10% of those eligible with more than £2000 of savings.

If one combines the two restrictions (making only renters with less than £2,000 of savings eligible) the proportion of eligible individuals in households who already save £10 a month falls to 30%, the proportion in households who could already afford an unexpected expense falls to 11%, and the share of individuals meeting neither criterion rises to two-thirds.

Figure. Options for the targeting of ‘Help to Save’

Note: Sample is eligible households as defined in the text, excluding households containing more than one ‘benefit unit’ and those for which the information on saving each month is missing.

Source: Authors’ calculations using 2013–14 Family Resources Survey and TAXBEN, the IFS’s tax and benefit microsimulation model.

There are potential downsides of introducing additional eligibility criteria such as these: as in so much of welfare policy, there is a trade-off between targeting the policy precisely and avoiding unwanted distortions to incentives. If those who already have some savings were excluded, that would create an incentive not to save now (or to spend down savings) in order to receive a subsidy on savings made later on. Of course, by targeting help on those receiving in-work benefits, the existing Help to Save policy will have incentive effects too: it will strengthen the incentive to claim those benefits (which would encourage some to do more paid work but would discourage others).

There is also a deeper and critical question about which groups are really ‘under-saving’. The key justification for giving a household extra money only if it places funds in a savings account, rather than giving it extra money regardless and letting the household decide what to do with it, is that we have reason to believe that the household is saving less than is ‘appropriate’ given its circumstances. It would be helpful for future research to shed more light on which groups are really under-saving in this sense. If a household has appropriately judged that, given its income, putting more money aside would mean forgoing too much in the way of spending now, then a subsidy that is available only if the household saves more is not the best way to help it. For example, the lower share of renters with a ‘rainy day fund’ might partly reflect the fact that they are not responsible for expenses associated with home maintenance and so have sensibly chosen to accumulate a lower stock of savings than owner-occupiers. Distinguishing better between households who have low saving for those kinds of reasons, and households who have genuinely saved ‘too little’ given their circumstances, is crucial for the design of policies such as these.

Note: Funding from the Joseph Rowntree Foundation is gratefully acknowledged.