What’s the difference between saving and investing? Many people confuse the two terms yet the difference is substantial. Savings refer to zero risk products that usually gain a nominal interest, which is close to but does not meet the general inflation rate. Thus the savings mount up over time but there is a gradual erosion of the purchasing power.
Investing is a risky business. The gains are substantial but there are downsides and these can occasionally be quite severe. Savings are important for society but the real driver of the economy is the level of investing in new productive capacity to grow the national domestic product.
Therefore it should be an important part of government fiscal policy to encourage investment at the expense of savings. But that is precisely what most governments are now failing to do. The easy gain to be made from taxing investments, in the same way that savings are taxed, leads to investors deciding that the risks aren’t worth the gains. Thus discouraged, the average punter restricts their financial product purchases to those products from the savings stable and the economy as a whole benefits far less.
What is needed is a wholesale review of the government’s approach and a real transparency about their intended aims. At present, governments across the developed world are working to transfer the pension risk from the national finances to the individual citizens. Yet there is no discussion with the populace about the risk they are being forced to undertake.
Instead all the effort is going into making the pensions appear risk-free and to concentrate all debate on the effect of charges. Whatever about the suitability of low-risk investments or savings to those nearing retirement, there is no doubt that younger people should not be made afraid of investing. High risks for high returns are the only way to go, if they are to be able to provide securely for their own future.
So why will governments’ not admit that the young should be risk-taking and change their fiscal policy to encourage this by reducing or eliminating tax on investment gains? The more we encourage the younger generations towards the equity markets and away from the short term safety of the bond markets the more hope there is for the economy as a whole.
The safety first approach of the NEST (National Employment Savings Trust) programme is just one example where the need to make people feel their savings are secure is likely to backfire by giving young people a sense of failure when they see their annual statements. The overcautious investment approach is likely to encourage them to adopt a more spend now approach, which will be to their own detriment as well as that of society.
It’s time to make the position clear to the population, and in particular to the younger generations, that they need to take a more high-risk approach to utilising their savings to the benefit both of society and themselves. This calls for honesty in explaining to people that they now carry the risk of providing for their own future pension and the re-organisation of the taxation system to encourage long-term investment by individuals. Without this, we risk a disaster in 25 years time.