Harvey Church's Log

Who is responsible for making sure I have my rainy day money?

21-08-2020

I am looking to move out. Part of this is deciding how much I am going to need to put away for a rainy day. In the current Covid-19 climate, this rainy day is looking mostly like unemployment, not a wrecked boiler or broken appliance.

Looking at what would be available if I was suddenly out of work, the Universal Credit system is the first port of call but might not cover me living with a high London rent and the bills associated. I might get some money from redundancy or severance pay but that is highly dependant on my length of service.

The buck falls to me to make sure I have savings put away to cover me through the months of searching for new work; the Money Advice Service recommends three months of essential outgoings. A study from 2018 for Legal and General (Atomik Research on behalf of Legal & General) found that 15% of those surveyed have no savings at all, and less than a third have under £1500 put away.

Should government then mandate we save more or should we look at schemes such as Italy’s TFR?

If we look at TFR in Italy were part of your salary is deferred, at to a point where might resign or leave due to illness, you can build up a comfortable buffer in case of a rainy day. Calculated to be about a 14th of your salary, plus 1.5% and something for inflationary concerns, it can work out - but has a similar pitfall to the current statutory redundancy pay that short term service can leave you in the lurch.

In comparison, Germany’s scheme acts in a similar way to the UK’s National Insurance contributions for benefits and pensions. For an employee, it stands at 2.5% of income, with responsibility be placed equally on the employer-employee to contribute. The conditions needed to quality are much like if you were seeking unemployment allowance and not a deferred payment like that of Italy.

So then what about the other way and placing the onus entirely on the employee?

Forcing the employee to look at their fixed outgoings and save 3 months worth might be a smart strategy - acting as an extra stop-gap before need to seak government support. This might be hard if the time frame was short.

If my situation changed and I find myself not wanting to be tethered as a renter, but buy a house? Let me use the savings as part of a deposit contribution and decrease my overall payment sizes.

If the current climate of low interest and a higher deposit sheet continues, we could see a large swathe of investment and renewed confidence in lenders. This is - of course- assuming normal economic circumstances.

Covid-19 has shown how government support has been extremely useful in cushioning in the short term the bite of economic shocks. In a 5 country comparison paper, the Institute for Government showed wage subsidy schemes have slowed unemployment. If we consider the borrowing needed to fund these schemes in some countries if we could reduce the amount by having force savings coupled with a better unemployment “insurance”. Both measures when an economy is not under economic strain could have a huge benefit, and be extended to allow such savings to be used at other times.