Who'd be a saver?
27 May, 2016
For generations children have been told the way to riches is to save money. The saying "look after the pennies and the dollars will take care of themselves," was coined in the 18th century and variations of the message have prevailed ever since.
People who develop good savings habits rather than spending all they earn (or more than they earn), are generally considered exemplary citizens worthy of admiration.
But in this environment of low, and in some countries, negative interest rates, savers are feeling far less virtuous than before. As one British saver commented recently: "In the current situation, those of us who scrimped and saved so we could retire are just a bunch of chumps".
It would be a crying shame if the notion of saving was discredited — it still makes sense to encourage a nation of savers if we are to enjoy high standards of living.
But central banks around the world are doing their darnedest to discourage saving and encourage consumption, and lots of it, to generate inflation and economic growth.
Central banks have many tools available to manage the economies of nations. The most popular since the 2008 global financial crisis has been the ability to move short term interest rates.
By reducing interest rates (through quantitative easing or buying back debt) central bankers have made saving less attractive but, rather than stimulating spending and economic growth, they have made shares, high-yield bonds, real estate and other risky assets with high returns more attractive.
We are in uncharted territory and, so far, low and negative interest rates have created the wrong sort of savings.
Economic textbooks will tell you low interest rates will stimulate businesses to borrow money to grow; they say growth will lead to more jobs, higher income and therefore more spending by consumers.
But it just hasn't happened.
Savers and investors have been forced into making risky investments in the search for halfway decent returns. Retired people have curtailed their spending and young people are discouraged from saving for their retirement (why bother when returns are so low?).
If the current scenario continues, future generations will be more dependent on government assistance and the government will have to borrow more in the future to top up the meagre savings of their citizens. That wasn't the plan.
A recent column in the Wall Street Journal noted unconventional monetary policies are making it nearly impossible for most households to accumulate sufficient savings. An example featured an individual with a master's degree, earning a salary of $US50,000 which grew to $US100,000 by age 45 and remained there until retirement at age 65.
If inflation and interest rates were to remain close to zero and the individual needed to accumulate savings of $US1.3 million in addition to Social Security benefits, he would need to save nearly 38 per cent of pre-tax earnings each year to pay for his retirement.
If interest rates were to slip into negative territory (as they are in Japan and parts of Europe), he'd need to save 49 per cent of every pre-tax dollar earned.
The numbers will be different for Kiwis but the principle is the same, and it is scary. The idea of having insufficient savings in retirement should encourage everyone to save. But low, zero or negative interest rates are a savings disincentive.
Maybe it's time for central banks to grab a different tool from their arsenal.