It is no longer profitable, yet the money keeps flowing into Belgian savings accounts. “In human terms it is understandable, but it’s a drama for our economy”, explains professor Gert Peersman. Are there alternatives? And what about saving for our old age?
“Is saving still a sensible thing to do these days? It’s actually a horrible question”, according to Gert Peersman, professor of economics at Ghent University. “There’s immediately a contradiction. On the one hand, it is sensible to put money aside for when you get older. However, on the other hand, from an economic perspective we save much more than we should when it comes to the health of the economy.”
At the present moment the interest rate is so low that you actually lose money by saving money. Those one hundred euros that you put on your savings account ten years ago are now worth less because you earn nothing on them and you can buy less with them. Ironically speaking it’s the fact we tend to save so much that is so bad for our savings.
“It’s our own fault”, explains Gert Peersman. “That’s because there’s no such thing as collective saving. For every euro that one person saves, another person must go into debt. That’s the way our economy works. The fact that the amounts on savings accounts keep growing means the interest rate must drop, so that someone else is prepared to borrow those savings. Once the interest rate is at rock bottom and there are not enough people or companies wishing to borrow, the economy shrinks because too little is being consumed. So in fact you save yourself silly.”
The consequence is a misalignment in the economy and he looks to the government for the solution: “It is important for the government to mobilise savings in order to kick start the economy. That is necessary to get it up and running again. This means the government must also take the lead in investments in scientific research. In the long term, the knowledge acquired proves extremely valuable. However, this means very little to individuals”, he says, putting his finger on the problem.
So what is the answer?
“There is no easy answer to the question of what to do instead. If we knew that we’d all be rich”, laughs Gert Peersman. “One thing that’s interesting is to invest in a kind of joint venture. For example: suppose a dredging company wishes to create an island off the Belgian coast in order to build a wind farm. You can invest in such a project via a joint venture. In this way you invest in new developments.”
However, it is also worth investing in your own home. “For example, by making extra investments in insulation, you will reduce the costs of running your home. In this way you stimulate the economy and indirectly reduce your consumption costs both now and in the future. This also increases the value of your house. That is also a form of saving.”
Pension: a comfortable life?
We can see it is not a good idea to leave your savings to evaporate in a savings account. But then what about later life? “It is almost essential to top up your legal pension”, believes Bart Chiau, professor at the faculty of Economics and Business Administration. However, parking your money in a bank account is not the best way, in his opinion.
“Your legal pension is the first component in your retirement income. The system is under enormous pressure due to the ageing population”, he explains. “In fact, just do the calculation yourself. Suppose you reach the age of 100 and you retire at 67. That means you spend 33 years in retirement. Take a moment to consider how much you want on top of your legal pension to live comfortably. The amount is astronomical”, he warns. “That’s why you need to add the second, third or fourth components.”
The second component in your retirement income is via your employer, for example, in the form of group insurance. The third element is personal savings. “These are accessible to everyone. Whether you’re a civil servant, office worker or self-employed. You can arrange a pension fund via your bank or insurance company, or organise long-term savings with your insurance company”, explains Bart Chiau. “The government is keen to encourage this third element, which means you get a tax advantage. The level of the benefit depends on how much you save.”
Then there is a fourth component in your retirement income. “This covers everything you save that does not qualify for any tax reduction. In other words: this can range from money that you invest in a securities account to investments in real estate or the purchase of bitcoins.”
These last two components are the ones in which it is best to start as soon as possible. “I say this to everyone who is prepared to listen: it is best to embark on personal savings as soon as possible. If your means allow it, of course. Clearly, the sooner you begin, the longer you save and the more you will earn. And it doesn’t necessarily need to be a huge amount. You can already start with savings plans as from 35 euros per month. Every little bit helps.”
The spread is important too. “Diversification is the key to comfort in your old age. You can invest some of your savings in property. Use another part to set up a pension plan. And perhaps use another part for some investment”, in his opinion. “Above all, do not leave it in a savings account. It’s such a shame for your savings to simply evaporate.”