Many economists question that assumption. If the elderly are forced to accept a poorer deal, with later retirement ages and less help with healthcare and other costs, then rates could stay low and the economy stay trapped in a “new normal”. With an uncertain future ahead, workers would feel obliged to save at a greater rate while they were still employed. By working for longer, saving would continue for longer.
Mr Goodhart and his colleagues argue that the threshold for doing this would be very high, because attacking the elderly is politically difficult and “very unlikely until demographic pressures are already well under way”, adding that “administrations have typically responded only at the eleventh hour”.
Others disagree. Joachim Fels, an economist at Pimco, responded with his own paper earlier this year entitled “70 is the new 65: demographics still support ‘lower interest rates for longer’”. Mr Fels said: “If you look at the data in more detail, people retire later and later in life and it’s those people who do the bulk of the savings who retire the latest. It’s the Warren Buffetts of the world, to take an extreme example. But there are many more people like that.”
The wealthiest find it easier to stay in work, and have a much lower propensity to spend what they earn. So, Mr Fels argues, this mutes the effects that ageing would have on markets. Dividing the US labour force by income, he showed that the participation in work by the top 20 per cent after the age of 65 had increased dramatically in the past two decades, and was likely to continue.
He now suggests his paper should have been called “Is 75 the new 65?”. If retirement continues to be delayed, and people put more money aside when they are in work, then the tipping point for demographics when savings start to fall can be delayed by a decade or more.
Inadequate pension provision in many countries adds to the problem. In China, there is little or no social safety net. In the US where the “401(k)” pension plans offered to baby boomers have had disappointing returns, many reach 65 without sufficient savings and have no choice but to keep working. With countries steadily moving away from offering guaranteed pensions, and requiring employees to bear the risk of any shortfall, the incentive to save increases.
But Manoj Pradhan, part of the team that produced the Morgan Stanley report and now a principal at Talking Heads Macro in London, argues that the sheer political difficulty of giving pensioners a worse deal ensures that a big demographic shift towards lower savings can only be delayed, not averted.
“In Japan,” he says. “They are not able to back away because the elderly are a large part of the voting population.”
Participation in work by the elderly bottomed out and started to rise 20 years ago, he says, but has still not kept pace with rising life expectancy. In western European countries, in particular, it is still rare for people to work after 65. “The spread between retirement ages and average life expectancies is widening over time; the rise in retirement ages isn’t keeping up,” he says.
Several European countries, such as Spain and France, could widen their retirement ages greatly. But the furious Greek response to lifting retirement ages during the eurozone crisis shows it is still politically difficult to implement.
In the US, where it appears that many corporate and municipal pension plans will be unable to pay what they promised, courts have blocked pension funds from reducing payouts.
All concede that broader cuts in what the state promises to pensioners are very difficult. As Mr Fels puts it: “Raising pension ages pushes down yields. The same argument applies to cutting payouts. Some call this ‘pension reforms’. Others call it ‘default’.”
Mr Magnus suggests a middle ground in the debate. He says various “coping mechanisms” have helped to mitigate the issue, such as reforms in Japan, to encourage carers and provide incentives for women to work. But migration, another way to offset the problem, is now going in the opposite direction, threatening to create a skills shortage.
“Capitalism rewards scarcity, and labour will become comparatively scarce,” he warns, adding that low rates will not be a long-term phenomenon. “That will raise the return on labour relative to capital. That will turn into a redistributive mechanism within society. That won’t happen in the next 12 months, but it is a logical consequence, and does mean higher rates eventually.”
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