Retiring in the United States amid low interest rates

Consistently low interest rates are bedeviling monetary and fiscal policymakers these days, but they are not alone in their frustration. As John Authers and Robin Wigglesworth note in the first in a series of articles published in the Financial Times earlier this week, low interest rates are causing significant problems for pension fund managers and ultimately retirees in the United States.

One way to think about interest rates is that the rate is the price of taking money from the future and accessing it today. A positive, inflation-adjusted interest rate means a dollar now is worth more than a dollar in the future, thus the need to pay a fee to get access to that money in the present. It also means that putting down less than a dollar now can get a full dollar in the future. The higher the rate, the less required to hit a target of a certain amount of dollars in the future.

So when interest rates are low, it’s going to require saving more money in the immediate future to meet a target, such as enough money to provide an adequate standard of living in retirement. That’s one of the issues causing problems for the managers of traditional, employer-provided defined-benefit pension plans and employer-sponsored defined-contribution plans alike. Lower interest rates lead to bonds with lower yields and a lower rate of return on equity investments due to higher current values for stocks.

But interest rates aren’t the only thing that determine how easy it is for an economy to support retirees. There are, as Bloomberg View’s Matt Levine points out, productivity growth and population growth. “If there are more working people than retired people, and if the working people are producing ever more stuff, they can make enough stuff to provide the retired people with a high standard of living,” he writes. The problem today is that both population growth and productivity growth are quite slow in high-income countries including the United States.

These conditions—often referred to collectively as secular stagnation—clearly pose problems for many of the ways that employers currently provide retirement security in the United States. Thankfully, there is one retirement program in the country that would actually be easier to finance during an era of low-interest rates: Social Security.