Over the last 150 years or so, numerous innovations have radically changed the way people live. You can tick off the list: electricity, the automobile, refrigeration, television, the Internet. Yet one innovation rarely makes those lists, even though it is just as significant if not more so: retirement.
The idea that people can stop working in their fifties or sixties and then enjoy 20+ years of relative leisure is actually quite new. For most of human history, the vast majority of people worked as long as they were physically able to – and died soon after. Retirement is possible now only because those other 20th-century innovations accelerated the division of labor and lifted us out of subsistence farming and living.
Our inventions often have a dark side that can come to haunt us. They may be applied to wage war… or to create reality TV. Are we going over to the dark side with retirement? Maybe not, but we’re certainly heading in that direction. And there’s nothing wrong with the idea of retirement, of course – the concept is a fabulous invention, helping to extend life and happiness. But retirement is made possible by a prior life of hard work and careful saving and investment. And the very funds that make retirement possible are dependent on growth of the economy. Without growth, retirement as we have come to know and love it will not work. Retirement will still be possible, of course – just not under the same conditions.
The zero interest rate and now negative interest rate policies of our central banks are gumming up the global retirement machinery. The Federal Reserve and other central banks have spent so many years subsidizing debt and punishing savings that it is now extremely difficult to guarantee future income streams at a reasonable present cost. And future income streams are the very heart and soul of retirement. Without adequate future income streams, retirement as we know it today is off the table.
Whether this sad fact is what the central bankers intended or not, it is indeed a fact, whether you are an individual saver or a trillion-dollar pension fund. Today we’ll examine how we have come to this unhappy point.
But first, let me mention that although my Strategic Investment Conference (May 24–27 in Dallas) is sold out, we’re trying hard to find a way to accommodate a few more people without compromising the experience for those who have already registered. We have created a waiting list, and you can click on this link and pay a small fee (which is refundable) to get on it. Seriously, we expanded the room this year and thought we were fine – then we sold out in less than a month! I have friends calling me up and asking to get in, as they have attended for many years. Not an unreasonable expectation. Believe me when I say we are trying, but there is a space issue. So even if we are BFF’s, get on that list! THEN call. The only way to be fair and to save my sanity is to do this on a first-come, first-served basis. The line is growing, so even though the conference is three months away, sign up NOW!
When Retirement Was Risk-Free
Saving money for retirement has never been easy for the average worker, but at least it was feasible if you started early and earned a middle-class living, especially if you had automatic deposits or a business or government guaranteeing you a pension. Plus, the bond market was on your side. Until the year 2000 or so, anyone could lock in risk-free 5% or higher yields in bank certificates of deposit.
Suppose you saved all through your career and accumulated a million dollars. It was a simple matter to put it all in CDs, Treasury bonds, or tax-free muni bonds and generate $50,000 a year in current income. Living costs were lower last century, too. Presumably, you also paid off your mortgage in the course of living the American Dream. Add in Social Security and you could enjoy a comfortable if not extravagant retirement. Your million-dollar principal would remain intact and could go to your children upon your death.
Again, this was relatively easy to do. It didn’t require any financial sophistication or even a brokerage account. The hardest part was saving the million dollars in the first place, but you could get by with much less if you drew down the principal over a 20- or 30-year period (and didn’t outlive the drawdown).
Better yet, you could do this with no risk, just by keeping your money in FDIC-insured banks. You might have to split it between a few different banks to stay within the limits. Some extra paperwork, but easily done. There were plenty of services that would help you distribute your assets over multiple FDIC-insured banks.
It was even simpler if you had an employer or union pension plan to do the work for you. Pension plans pooled people’s money, calculated how much cash they would need to pay benefits in future years, and built portfolios (mainly bonds) to match the liability projections. Government and corporate bonds yielded enough to make the process feasible.
Younger readers may think I just described a fantasy world. I assure you, it was very much a reality not so long ago. Ask your grandparents if you don’t believe me. However, you may find them in a state of shock today because they thought the fantasy would last forever. Indeed, their financial planner probably told them they could count on drawing down 5% of their portfolio per year to live on, because the income from the investments in their portfolio would more than make up for the drawdown.
None of this is possible today. Neither you nor a massive pension plan acting on your behalf can generate enough risk-free income to assure you a comfortable retirement.
Why not? Because our monetary overlords decreed that it should be so. Retirees and their pensions are being sacrificed for what now passes as “the greater good.” Because these very compassionate overlords understand that the most important prerequisite for successful future retirements is economic growth. And they think that an easy monetary environment is the necessary fertilizer for that growth. So, when they dropped rates to zero some years ago, they believed they would soon be able to raise them again – and get people’s retirements back on track – without risking future economic growth. The engine of growth would fire back up, and everything would return to normal.
So much for the brilliant plan. You and I, the expendable foot soldiers in the war to reignite growth, now gaze about, shell-shocked, as the economic battlefield morphs from the Plains of ZIRP to the Valley of NIRP.
Ultra-Low Rates
In fairness to our central banks, they must balance competing priorities. The Fed’s statutory mandate is to promote “maximum employment and stable prices.” Their primary tools to execute this mandate are the manipulation of the money supply and interest rates. Since 2008 they relied on near-zero interest rates to stimulate economic growth. As I wrote last week, the Fed (and much of the economics profession) sincerely believes that low interest rates will do the job they’re supposed to.
However, the hard evidence of the past few years is that ultra-low rates, combined with quantitative easing, haven’t stimulated much growth. Unemployment has fallen, which is good – but probably not as good as the numbers suggest, because people have gone back to work for lower pay and are now even deeper in debt. Personal income growth has stagnated, as we will see a little later in this letter. So, are we better off now than we were five years ago? The answer is a qualified yes. But it is not entirely clear, at least to your humble analyst, that the halting economic recovery is the result of low interest rates and not other less manipulable factors such as entrepreneurial initiative and good old muddling through. In fact, an ultra-easy monetary policy may be part of the reason we’ve been stuck with low growth. Witness Japan and Europe. Just saying…
Seriously, no one fully understands how all the moving parts influence each other. Years of ZIRP did help businesses and consumers reduce their debt burdens. ZIRP and multiple rounds of QE have also done wonders for stock prices … but not much for the kind of business expansion that creates jobs and GDP growth.
If year upon year of ultra-low rates were enough to create an economic boom, Japan would be the world’s strongest economy right now. It obviously isn’t – which says something about ZIRP’s efficacy as a stimulus tool.
What isn’t a mystery, however, is that ZIRP has created a massive problem for retirement savers and pension fund managers. NIRP will make their problem worse – and they were already facing other challenges as well.
If we get negative interest rates for a sustained period, similar to Japan and Europe, it will be because the economy is stuck at no-growth or in contraction. Stock prices will head the other direction: down. It will be the mother of all bear markets. We are getting a little taste of it right now in bank stocks. Look for much worse as the growing impact of NIRP and the threat of NIRP reaches other sectors.