In this installment of Money Perspectives, William Mahnic, associate professor of banking and finance at Case Western Reserve University in Cleveland, offers his thoughts on retirement saving, baby boomers leaving the workforce and the impact of ultra-low interest rates.
MoneyRates.com: What should the government do to encourage Americans to save more for retirement – or should it even bother?
Mahnic: The government already does a lot to encourage Americans to save for retirement. Traditional IRAs and Roth IRAs offer very attractive tax benefits to taxpayers who take advantage of them. Both employees and employers gain similar tax benefits from 401(k) savings plans. Corporations are allowed to deduct contributions to both defined benefit and defined contribution retirement plans. Perhaps we have reached the point where some Americans do not realize the importance of saving for retirement or prefer to rely on future government largess to fund their retirements.
You can lead a horse to water, but you cannot make it drink!
How might the retirement of the baby boomers impact the economy?
I would expect a slight increase in the demand for fixed-income investment products (bonds, annuities, etc.) as the baby boomers begin to retire. As we retire, our aversion to risk increases since we have less time to recover from market downturns. Also, we are willing to give up some “upside” in order to obtain the steady, low-risk stream of annual income that is offered by bonds and annuities.
MoneyRates.com estimates that Fed policy has cost U.S. savers more than half a trillion dollars. Have the Fed’s low-rate policies been worth the lost income to retirees and other savers?
The answer to that question would require a great deal of assumptions and forecasting. What we can say, however, is the cost of keeping interest rates low has been borne by retirees and pension funds while the benefit of these historically low rates has been enjoyed by the financial institution industry and both individual and corporate borrowers.
The cost of low rates has not been fully compiled. The Federal Reserve Bank, at some time in the future, will have to reduce its swollen balance sheet at the risk of inducing an economic recession. Failure to reduce the balance sheet puts the U.S. economy in danger of a large increase in inflation.