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Pensioners have been ‘hit particularly hard’ by the recession

Both pensioners and the poorest households have been badly hit by the recent recession, according to a report produced by the Institute of Fiscal Studies (IFS) and funded by the BBC.

The IFS estimates that in the three years from 2008 to 2011 real household incomes will have fallen by 1.6%, or £360 per year. This means that households are likely to be about 6% worse off than they might have expected to be if incomes had risen normally.

This will be the first time that incomes will have fallen over a three-year period since 1990-93 and is the biggest three year drop in real living standards since 1980-83.

The fall in living standards is due to a combination of lower employment; lower interest or savings income; lower real earnings and tax and benefit changes. Of these, lower real earnings and lower interest on savings were the biggest contributors to the fall. On the other hand, the median household, gained from changes in direct tax and benefits.

In actual fact, the richest households have been hit the most, losing out by £2200 or 3.8% when compared to 2008. However, most of us will be able to hold our sadness in check for this group, as it is pensioners that have fared really badly. The various effects can be seen in the two Figures below.

Source: IFS

Source: IFS

The IFS expects that the median income of pensioners to have fallen by 2.4% or £460 per year over the three years from 2008-09 to 2011-12. This is because they were particularly badly hit by the fall in savings rates, which was not offset by improvements in tax and benefits as it was for other income groups.

There were also falls of 1.1% or £230 a year for working-age households with children, and a fall of 1.8% or £500 a year for working-age households without children.

The IFS believes that household incomes are likely to remain stagnant for some time to come. The report says that: “Household incomes will probably still be below their 2008 level in 2013. If so this will represent the biggest fall in incomes over a five year period since 1972-77.”

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Posted in Household income, Interest rates, savings, taxation

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