I wrote praising one aspect of Fed Chief’s Bernanke’s regime: “The Fed has correctly held interest rates effectively at zero, and should do so for some time to come. When faced with a potential depression, we need active government tools to fight it.”
Low interest rates are a great way to fight a depression. But a commentator on my blog got it right: Low rates have creamed senior citizens who have had to rely on financial markets, including interest from savings and certificates of deposit as well as risky stocks and bonds to deliver stable pension income.
Couple the low interest rates and returns with high fees and we have a failed, if not corrupt, pension system. This all came about because of the decline in traditional pensions and the rise of 401(k)’s fueled primarily by Wall Street lobbyists. Firms also dumped their good pensions because they had to compete with employers who didn’t offer good pensions .
Alicia Munnell at Boston College rightly links the rise of 401(k)’s to risky retirements. I propose Guaranteed Retirement Accounts that provide a guaranteed return on savings but still let people control how much they save. We need both stable pensions and the use of interest-rate policy to fight the business cycles.
We need drastic pension reform that delinks pensions from the finance markets they’re tied to so closely, leaving seniors having to take all the risks and getting hardly any reward.
9 Responses to Retirees Get Skunked by Necessary Low Interest Rates
bfrank1 - January 25, 2010 at 9:38 am
Good luck with that. Boomers have got to realize that we are the fatted calf – everything is great on the upside, then they start sharpening the knives and restricting your movement. With enough medications we won’t feel a thing.
johnga1949 - January 25, 2010 at 9:45 am
I do not see how “delinking” pensions from financial markets would work. Pension plans operate by taking in funds and investing them for the future. The only way to delink them is for taxpayers to assume the burden of paying retirement. It just makes no sense to say you would avoid the finance markets.
cwinton - January 25, 2010 at 10:27 am
I think the “delinking” idea is more one of ensuring in the future that pension money is conservatively invested so there is a predictable rate of return rather than a return based on the assumption that playing the market will improve outcomes. Events have shown that given the opportunity, human nature being what it is, far too many are willing to use their 401(k) money to gamble on volatile stocks, with results almost as predictable as taking it to a gaming table in Las Vegas. Just think of the mess we would be in if the lame brain who suggested we handle Social Security the same way had prevailed.
livefreeordie2 - January 25, 2010 at 10:40 am
Pathetic socialist nonsense. We already have that – it’s called Social Security. You pay in, you have no control over the returns on your investment, and you are paid a “guaranteed” amount. The only problem is that the returns are dramatically less than the financial markets and the guarantee can disappear at any time. Ghilarducci’s real problem with 401(k) is that people are in control of their own money. If I wish to keep everything in equities for a greater gain, then I have greater risk. Or I can choose to keep my money in bonds. Or, more reasonably, like the vast majority of people do, I can maintain a diversified portfolio in which risk declines as I get closer to retirement. The real sin here is that the government can’t get its hands on that money, right Ghilarducci?The idea of a “guaranteed” anything is preposterous. I grew up in Bethlehem, PA. Workers at the Bethlehem Steel were on a gravy train negotiated by a strong union and acceded to weak management. Workers were paid way out of all proportion and rarely gave a full day’s work for a full day’s pay. After 15 years or so, they got 13 weeks of vacation. The pension benefits were lavish – set for life – with full free health care. But of course, union greed drove the steel industry into bankruptcy as it has done with the auto industry. The guaranteed pensions were taken over by the government for far less than they were promised.So. . . if your company holds your money, it’s at risk. If the government holds your money, it’s probably already been spent. Investing your money yourself and maintaining control is always the safest bet. It’s true that little Barry can get a fit of pique when his health care scheme gets stopped and he can spend 3 days talking the market down 600 points, but the US markets have always bounced back. I doubt sincerely that the American people would ever fall for Ghilarducci’s extremist risky statist scheme to give the government even more control over their lives.
dank48 - January 25, 2010 at 10:43 am
“A predictable rate of return” is what people are getting. It’s next to nothing, of course, but it’s certainly predictable. I understand economics about as well as I understand Classical Martian, but the one way to minimize risk is to settle for minimal return on investment. Maximizing (potential) returns maximizes risk. What we want, of course, is a high rate of return with minimal risk. Nice idea; so are world peace, universal justice, and eternal life.
johntoradze - January 25, 2010 at 12:07 pm
The problem of the boomers is economic fundamentals and it can no more be beaten by fiat than gravitation. Pass a law repealing gravity and you accomplish nothing. Unfortunately, that is what this proposal amounts to. The boomers are an economic wave moving through time that has run up the value of everything people of their age demographic are interested in. That is why the retirement fund driven markets of the mid 90′s through 2000′s ran up. That was boosted by deregulation.I calculated 15 years ago that 2008 was the most probable time for the net outflows from capital markets to equal net inflows. From here on until the boomers die, the need will be net outflow. This will be true in Europe, North America and to a lesser extent in Japan. The generation that preceded us, our parents, was buoyed up by the boomers productivity. Think of the economy as a balloon, and the rate of productive work that goes into the balloon determines the size of it. But the balloon is leaky. A physicist would call this entropy, because things break, needs change, etcetera. This leaky balloon can support some number of non-productive members, but if the number gets too high, and the productivity doesn’t change, well – there you are. The balloon contracts. That is what is happening now, and it is just beginning. The next 20 years are going to be very hard on the boomers. The next 20 years are going to be very hard on the entire world, because the economies of the world simply cannot support the number of wannabe retirees. We will be seeing more and more of this as time goes on. Arguing with it by calling for legislation is like arguing with the waves on the beach. Go right ahead, but it won’t get you anywhere. Instead, what we boomers need to do is to cinch up out belts, suck it up and accept that we must work hard into our 80′s. Shikata ga nai. We lived through a golden age in our youth. Shikata ga nai.
11264553 - January 25, 2010 at 2:08 pm
Yes, SS is too little to live on, up here. And yes, the insurance companies that run so many 403(b) funds do not let you invest in what you want [I wanted to put my money into 30-year t-bills at 8.49%. V***c gave me a horse laugh.]Several staff people here have come to me about this dilemma, because they’re even worse off than faculty. I’ve traveled quite a bit, and began advising them of places down south where they could live fairly well on SS alone. OK, call me politically incorrect or insensitive, but when these scams don’t work out, as they inevitably will not, there are good places to live in Mexico, Costa, etc., if you know where to go. And you’ll be helping the locals, because inflation down there is even worse than up here, and they really need the money. They really need the money.So do everyone a good turn: leave America when you retire, because America is leaving you….
lenoreb - January 25, 2010 at 4:17 pm
To livefreeordie2–I also grew up in Bethlehem PA and my father WORKED for Bethlehem Steel. He was an electrician and after 18 years there he was making $6000 per year. Somehow I don’t recall the thirteen weeks of vacation (what??), full pension and health care, gravy train, lavishness, etc. He took a car pool to and from work and came home late. He died of a stroke during the 1959 strike. Maybe all those great things happened after 1959??Of course everything cost a lot less then and we could make do on that $6000 a year. But what you describe in your post is offensive in the extreme. It was a blue collar existence with, however, the benefits that a–yes–strong union could provide.So much better now, eh??
livefreeordie2 - January 25, 2010 at 5:26 pm
Lenoreb – I’m sorry about the loss of your father. My father passed away in 1987 and the grief never really goes away. . .As a matter of fact, you are correct. The 1959 strike, which was nation-wide and lasted roughly 4 months, was settled as a huge victory for the unions. Unfortunately, the drastically increased wages and benefits drove up the price of domestic steel while the 4 month break in production led manufacturers to explore imported steel. It was the beginning of the end for big US Steel.My old man didn’t work for the Steel Co. He was protestant pastor who completed college, three years of seminary, a masters degree and a Doctorate of Sacred Theology. In 1959, his salary was roughly $3500, though he did have his house provided for him. Don’t misunderstand, I had as good a childhood as anyone. . .but I remember being 8 or 9 and wishing he’d worked in the mills like my friends’ dads. They did a lot better financially.