Pensions misery looms for the 'have-it-all’ generation

As the baby boomers approach retirement, many face a pensions crisis thanks to quantitative easing. 

By Jeremy Warner

Intergenerational unfairness is one of those intellectually sloppy complaints that nevertheless commands a strong following among a certain cadre of privileged young metropolitan types. It even has its own think tank – the grandly named Intergenerational Foundation. Already there is a huge volume of literature on how voracious baby boomers have stolen the food from their children’s mouths – and pretty vacuous stuff it is too.

When it comes to the aberration of absurdly high house prices, there may even be something in it, but it seems an oddly irrelevant obsession set against much more worrying divides, such as wealth and regional disparities within generations. The unfairness lies not in the fact that the old are in aggregate so much richer than the young – this has always been the case – but that children from poorer backgrounds will generally be at a substantial disadvantage to those from richer ones.

Yet for those who continue to insist that the baby boomers have had it cushy, consider the following. 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.

Obviously, these numbers cannot be taken in isolation. Households may have benefited in other ways from QE, for instance via improved employment prospects. Money-printing has also put a rocket under asset prices, so there could be an element of swings and roundabouts. Certainly this is what the Bank of England tends to argue. Unfortunately it ignores the fact that most household saving is in the form of relatively small cash deposits, which have been greatly eroded by “unconventional monetary policy”.

The consensus when these easy money policies began was that despite the distributional consequences, such measures were unavoidable and overwhelmingly the right thing to do. Yes, they were unfair on savers, but, actually, that was the whole point – an attempt to force those with the balance sheet strength to disgorge their money so as to compensate for the collapse in debt-fuelled spending by those without it.

The longer this form of market manipulation has gone on, however, the more questionable it has looked, and the more obvious its undesirable side effects become. As if to prove the point, along comes the Governor of the Bank of England, Mark Carney, to announce measures to counter a nascent house price bubble, which his own policies are helping to inflate. There is indeed no mess quite so bad that official intervention won’t make it even worse.

And what about QE’s fabled upside? Well, so far there has been virtually no evidence of negative real interest rates generating a revival in business investment. Unsure in these surreal monetary conditions what an adequate rate of return might be, many companies have chosen to sit on their hands.

Some cash savers have likewise been spooked by the abnormality of today’s interest rate environment and saved even more. With some sort of a recovery under way, a full-scale reappraisal cannot come soon enough.