The Washington Post

Lucky enough to have a pension? The Fed's low interest rates mean it may no longer guarantee a secure retirement.

The central bank's efforts to keep the economy afloat are undermining the long-term future of the U.S. pension system

By

Allan Sloan

Oct. 21, 2020 at 8:00 p.m.

The Federal Reserve has done a lot to help keep our economy afloat. It has cut interest rates to unprecedented low levels, which helped stabilize the debt markets and helped rescue a stock market that had begun falling sharply in mid-February when the covid-19 recession started and had seemed headed for a crash.

But if you dig deeper, you'll see that the Fed is unintentionally worsening economic inequality by providing the most help to Americans who are least in need of it and putting stress on the most important asset for the middle class: retirement benefits.

Higher stock prices are great for people who own a lot of stocks, but stock ownership is heavily concentrated. The top 1 percent in terms of wealth own 52 percent of stocks, according to Fed statistics, and the top 10 percent own 88 percent.

Despite its good intentions, the Fed is setting the stage for huge problems down the road for pension funds and potential pension recipients. There are also going to be problems for insurance companies and other firms onto which many corporate employers have offloaded their pension obligations in order to clean up their balance sheets and minimize their future financial risks.

The firms that have assumed the responsibility for paying these pensions typically own bond-heavy portfolios. And with bond rates expected to rise in the future, that will decrease the market value of the bonds held by the firms that have assumed responsibility for paying pensions.

The Fed is trying to salvage the present by pumping trillions of dollars into the U.S. and world financial systems, but in the process it is putting our economic future at risk. "We're bailing out the present and making the future pay for it," said Gene Steuerle, a co-founder of the Tax Policy Center.

Please note that I'm not blaming the Fed. It's trying to fulfill its mandate to keep employment high, inflation relatively low, the dollar reasonably stable and interest rates at what it considers an appropriate level. The Fed's job, already difficult in strange and uncertain economic times like these, is being made much harder by the lack of new economic stimulus packages from Congress and the White House. These packages not only help individuals but also stimulate the economy when recipients spend the money they've gotten.

The Fed, by contrast, can help the financial markets and the economy but can't directly help individual people.

Now, let me show you how the Fed's ultra-low rates over the past dozen years, which Fed Chair Jerome H. Powell says will continue indefinitely, are undermining the long-range future of the U.S. retirement system. This matters a lot because retirement benefits (not including Social Security) are hugely important to the middle class.

Edward Wolff, an economist at New York University who studies income and wealth inequality, told me that Fed statistics show that pension wealth accounts for 70.3 percent of the net worth of the middle class, which he defines as people ranking in the 20th through 80th percentiles in terms of wealth. By contrast, he said, retirement benefits account for only 2.2 percent of upper class's wealth.

- What are the benefits of low interest rate policy?

-Which particular sectors are being affected the most by the Fed's interest rate policy?