In all our discussions about the Fed's Quantitative Easing and Zero Interest Rate policies, we've acknowledged many of the dangers inherent in them. However, another risk has emerged over the past few years, focused particularly on savers and those about to retire or already retired and living on their savings and investments. It's now a clear and present danger, not just a prospective problem.
As John Mauldin points out in his latest 'Thoughts From The Frontline' newsletter, which he ominously titles 'Arsonists Running the Fire Brigade' (link is to an Adobe Acrobat document in .PDF format):
I am becoming increasingly exercised that the new direction of the US Federal Reserve, which is shaping up as "extended forward rate guidance" of a zero-interest-rate policy (ZIRP) through 2017, is going to have significant unintended consequences.
. . .
It is this neo-Keynesian fetish that low interest rates can somehow spur consumer spending and increase employment and should thus be promoted even at the expense of savers and retirees that is at the heart of today's central banking policies. The counterproductive fact that savers and retirees have less to spend and therefore less propensity to consume seems to be lost in the equation. It is financial repression of the most serious variety, done in the name of the greater good; and it is hurting those who played by the rules, working and saving all their lives, only to see the goal posts moved as the game nears its end.
Central banks around the world have engineered multiple bubbles over the last few decades, only to protest innocence and ask for further regulatory authority and more freedom to perform untested operations on our economic body without benefit of anesthesia. Their justifications are theoretical in nature, derived from limited-variable models that are supposed to somehow predict the behavior of a massively variable economy. The fact that their models have been stunningly wrong for decades seems to not diminish the vigor with which central bankers attempt to micromanage the economy.
The destruction of future returns of pension funds is evident and will require massive restructuring by both beneficiaries and taxpayers. People who have made retirement plans based on past return assumptions will not be happy. Does anyone truly understand the implications of making the world's reserve currency a carry-trade currency for an extended period of time? I can see how this is good for bankers and the financial industry, and any intelligent investor will try to take advantage of it; but dear gods, the distortions in the economic landscape are mind-boggling. We can only hope there will be a net benefit, but we have no true way of knowing, and the track records of those in the driver's seats are decidedly discouraging.
There's more at the link. Underlined text is my emphasis.
As if to drive home the point, the Telegraph this week pointed out precisely these consequences for British pensioners.
As the baby boomers approach retirement, many face a pensions crisis thanks to quantitative easing. Central bank money-printing has impoverished a generation of older, small savers.
. . .
Say you have done the right thing throughout your working life, and saved when means allowed.
A typical middle-income earner might in that time reasonably hope to accumulate a pension pot of perhaps a couple of hundred thousand pounds. This, at least, is the position a friend finds himself in approaching retirement age. As it happens, the average pot on buying an annuity is much smaller – just £33,000.
To his dismay, my friend has discovered that his own, considerably larger sum will buy him and his wife a pension of little more than £10,000 a year, and that’s assuming both no inflation-proofing and that he invests the lot, rather than take his entitlement to a tax-free lump sum.
Together with the basic state pension, this may be just about enough to keep the wolf from the door, but it can hardly be thought of an example of rampant intergenerational unfairness. Many retirees face much worse, leaving them reliant on benefits.
One reason for these now painfully low annuity rates is rising life expectancy. Yet the bigger explanation is officially sanctioned, ultra-low interest rates. Central bank money-printing may or may not have saved Western economies from ruin in the aftermath of the financial crisis, but it has also disfranchised a generation of older, small-time savers.
Just as the main demographic bulge of post-war retirees come to buy their pensions, they find themselves – thanks in part to these interventions – confronted by the lowest rates of return in history.
A recent report by the management consultants McKinsey tried to put hard numbers on the consequences. Their findings were shocking. Since 2007, the world’s four most influential central banks have injected more than $4.7 trillion of new money into the world economy.
The effect has been to help drive both short- and long-term interest rates to record lows. The chief beneficiaries, as you might expect, are governments with big deficits. In the UK alone, ultra-low interest rates are reckoned to have saved the Government some $120 billion since the start of the crisis.
Highly indebted households will also have derived a major benefit. Without these interventions, many would be facing foreclosure. What tends to be forgotten, however, is that most households are net savers, not debtors. On the McKinsey figures, households as a whole have lost out to the tune of $110 billion – a massive transfer of income from people to government, amounting to nearly half of what the Government collected in income tax last year.
Again, more at the link.
Obviously, the Telegraph's article applies to British pensioners; but precisely the same problems are evident in the US pensions industry. Just look at the number of pension funds that are still rosily calculating their growth in terms of utterly unrealistic projections that haven't been achieved in practice for years. Despite this fact, they're still basing their promised payouts to their members on those impossibly high projections. I personally regard that as fraudulent, plain and simple; but the law doesn't go that hard on them. That's a pity, IMHO. (Read these three links to get more information about this issue, or search for more information yourself. The problem affects both private and public pensions, the latter including local, regional, State and Federal funds alike.)
QE and ZIRP have effectively run the majority of savers' pension plans into the ground. We'd all better be planning accordingly. Last week there was a headline that '80 is the new 60 when it comes to retirement'. Sadly, that's probably absolutely correct.