Hamish McRae: We will have to trust ourselves in the future

Not even Chancellor Brown is clever enough to manage every tiny aspect of our personal finances

The young are no good with money. So says the Financial Services Authority, the financial markets' watchdog. It has just done a survey that shows, among other things, that people aged 18-30 have the poorest understanding of basic financial facts, such as if you invest in an equity ISA, the value can go down as well as up. The country as a whole seems pretty poor at financial planning, with two out of every five people having no pension provision, but the young are apparently much worse than their elders.

Particularly worrying is the rise of indebtedness among the young. Adults under 29 now account for 20 per cent of all bankruptcies, more than double the level of four years ago. You might reasonably expect younger people not to care so much about pension planning but this rise in debt is new.

This leads to a wider concern: that young people are at an economic disadvantage more generally vis-à-vis earlier generations. If they have been to university they are more likely to emerge with heavy debts. House prices are at record levels relative to earnings, so they find it harder to get onto the property ladder. They will have to pay higher taxation to fund the older generation's pensions. They will be forced, in addition, to save for their own pensions. They will probably have to work harder and they will certainly have to retire later.

Put like this it sounds a pretty toxic combination. Not only are the young worse at coping with money but they are going to have a tougher time anyway.

Mercifully, things are not quite as bad as they appear. It is true that people who retired recently have been an extraordinarily lucky generation. Not only have they have lived through a long period of prosperity, but it was also a period where they could rely on others - the state or their employer - to take care of their pension. Income tax, for much of their working lives, was high - but there was the compensation, for home-owners at least, of large increases in the real price of their main asset.

People entering the workforce now face a rather different economic climate. There are more pressures, but there are also more opportunities. Living standards are far higher than they were a generation ago. Indeed, they are about one-third higher than they were a decade ago. In crude material terms, most young people are significantly better off than any previous generation. If they will have to work longer, that is because they can expect to live longer, which surely must be a benefit too. But they will have to rely much more on themselves. They will not automatically be swept along by a rising tide of prosperity.

Thus while young people have much more choice - of careers, lifestyles, locations - they will only benefit if they choose wisely. We are becoming a much more segmented society, not just here in the UK, but globally.

Look at the huge numbers of young continental, American and Australian people working in London and the South-east. They chose to come to London largely because of the economic opportunities it offers. But that means that young Britons are competing directly against some of the best-trained and hardest-working young people on the planet. Look too at the numbers of jobs that have been off-shored to India. As a result, young British IT graduates are competing against much larger numbers on the other side of the world, who may be just as well-trained and will be prepared to work for considerably lower wages.

So the FSA's point: that young people need to know more about managing their money, is just one aspect of a larger issue. They need to know more about managing their careers - you could almost say managing their lives.

So what is to be done? Well, the FSA plans to spend £20m over the next two years to try to educate children and working people alike on the basics of personal finance - and that sounds a good start. It would seem sensible to ponder whether there should be some basic financial education in the schools. We have the advantage of a very centralised education system, so I suppose it would be fairly straightforward to roll out such a programme. Whether school-teachers are the ideal people to inspire the kids about managing their future financial affairs is another matter, but anything is better than nothing.

The financial service industry could surely do more - and it is very much in its self-interest to do so. There must be a case for self-restraint; I find I get a letter offering some new savings scheme or yet another credit card about twice a week. The documentation we receive on financial products is pretty terrible, designed to comply with petty regulations (including those of the FSA) instead of giving a clear description of the product or its performance. The regulators need to consider whether they are more interested in clarity or in covering their own tails.

But there is something much wider that is needed. It is to convey to all of us, young and old, that we will have to take much more responsibility for ourselves. We cannot rely on an all-wise state to fix it - not even Chancellor Brown is clever enough to manage every tiny aspect of our personal finances. Who can say what voters 30 years from now will do about pensions?

Similarly we cannot rely on employers to stay solvent. Many of today's huge companies, employing tens of thousands, will go bust in the next 30 years. While, post-Maxwell, we can rely on them not to steal our pension money, we cannot rely on them not to lose it. So we must trust ourselves.

We will have to trust ourselves to be adaptable, for many of the jobs a generation hence do not exist yet. But we also have to trust ourselves to be cautious: to plan for lean years as well as fat.

For many people, this will be great adventure. People with talent, skills, energy, style, wisdom, entrepreneurship and common sense (most important) will be in great demand world-wide. But for many this will be an alarming prospect: too much uncertainty, too much choice. And some simply will not be able to cope. A more segmented society seems inevitable: segmented mostly by ability and education, but also by family and values. What we have hardly begun to think about is how we should deal with people who hate this more competitive world or who, for whatever reason, cannot cope with it.

So the FSA education project is a start. Let's see how it goes. But let's also think of it as a pilot scheme for something much bigger - something that helps people not only manage their finances but manage other aspects of their life. I suppose you would call this "life skills". I have no idea how you teach these but I am sure they will matter more and more.