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Low Rates Force Hands for Pensions, Retirees

January 30, 2017

Pensions may be a thing of the past in terms of benefits offered by employers and governments, but they’re still very much present-tense in their liabilities and the fact that many retirees rely on them.

That makes it even more troubling that they’re underfunded, meaning their liabilities are greater than the value of assets they hold, which the Congressional Budget Office highlighted in 2011.

 

Whether it’s teachers, firefighters or police – promises were made and those promises shouldn’t be broken. These people do valid work that is often thankless.

 

At the same time, economic realities are what they are. Why should someone have to swallow higher taxes to foot the bill for underfunded pension liabilities?

 

How did we get here?

 

In short, the Federal Reserve. Public pensions were funded in 2000. And back then, earning 7 or 8 percent returns wasn’t difficult.

 

The last 16 years we’ve seen rock-bottom interest rates and amped up volatility on fixed income. Who does that hurt? Savers and retirees, especially the latter.

 

Fixed income sources are where conservative investors like retirees should be. But if they can only make a fraction of a percent and have to absorb risk to do it, what’s the point?

 

The damage of low-rate policies doesn’t stop there. There’s a full feedback loop that doesn’t seem to have been considered by the Fed.

 

For those who are nearing retirement but haven’t saved enough, they have to choose between saving more or contributing to the economy (i.e., buying goods and services). When conservative investments don’t produce, these folks have to save even more, which further decreases their buying power and willingness to purchase.

 

Thus, our economic recovery and growth won’t accelerate because pension funds and people alike are being forced to choose between saving more or taking on risk.

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