Daily Express feature article ‘Bank of England must show more respect for savers’
by Dr. Ros Altmann
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Decimating pensions in an aging population means economic decline, not growth!
Have your savings been hit by exceptionally low interest rates? Are you coming up to retirement and finding your pension will be much less than you thought? Has your final salary pension scheme been hit by a ballooning deficit? If so, you might be quite angry with the Bank of England.
Charles Bean, its Deputy Governor, has dismissed the concerns of savers, and defended the continuation of low interest rates. Mr. Bean believes savers will have to eat into their capital and should not expect to live on the income from their savings. He thinks it is more important to encourage people to spend and says that a key aim of Bank of England policy is to deter people from saving. This is not a ‘side effect’ of its monetary measures to help the banks, it is a deliberate policy choice.
In my view, this could seriously damage all our long-term futures.
Not only is a policy of penalising prudent savers in order to help borrowers and bankers patently unfair, it also ignores the perils of low rates for pensions and inflation. Low interest rates have caused pension liabilities to soar and driven down annuity rates, damaging millions of people’s pension prospects.
In an aging population, this is dangerously short-sighted. The savings ratio has fallen dramatically since the end of the 1990’s and baby boomers approaching retirement in coming years need to be saving more, to have money to live on in retirement, otherwise they risk poverty. And anyway, if savings income falls, more pensioners may have to claim means-tested benefits.
Mr. Bean appears not to be properly factoring in the demographics realities. He is relying on theoretical arguments that spending will create growth and help the economy. Such arguments may sound good in theory, but in practice, with millions of baby-boomers coming up to retirement and a huge overhang of debt, it is focussing too short-term.
Of course, if people have plenty money and will be able to build up more savings later, then spending now could help. But it is folly to encourage those who should be repaying debt or saving for their future, to keep spending money they do not have or will need in future.
Destroying savings incentives and undermining pensions just when the aging population is going to need more savings to support themselves, is a recipe for long-term economic decline. Everyone loses in the end if increasing numbers of people will have less money to spend when they retire.
Savers have not only been hit by low interest rates but have also been damaged by high inflation, which has consistently exceeded the Bank of England’s target. Indeed while policy rates have been kept near-zero, inflation is almost 5% on the retail price index (rpi) measure and still over 3% on the consumer price index (cpi). This means savers have suffered falling capital in real terms, as well as seeing their savings income disappear.
The Bank of England brought rates down to fight deflation, but that is not the problem any more. Growth is weak, but maybe that is the best we can expect until the debt overhang is worked off.
Growth at all costs is not a recipe for long-term success, indeed isn’t that how we got into the crisis in the first place? In recent years, central banks kept interest rates too low for too long, encouraged too much borrowing, facilitated financial speculation and led people to believe we could all live beyond our means without worrying about the future consequences. Such policies made people feel good and encouraged us to believe we could live beyond our means. This led to the credit crisis, as lenders recognised the real risks that the debts may not be repaid. Forcing people to keep spending and not saving risks an even worse crisis in future.
Mr. Bean’s comments also undermine the Coalition Government’s claims to want to rebuild our savings culture and reinvigorate pensions and retirement. By punishing those who did save for their future, the Bank will deter future generations from saving.
The bottom line is that I’m afraid this policy will not work. It risks creating an inflation problem as well as leaving pensions in trouble. A low rate, high inflation environment is great for banks for borrowers at the moment, because it lets them off the hook, but eventually debts must be recognised and repaid.
So what do we really need? As Government spending is being cut, we need to encourage businesses investment rather than consumer spending. Unfortunately, however, bank lending to smaller firms has become much more difficult and expensive, despite low rates. Businesses are being denied credit or being charged extortionate fees for their loans. So the Bank of England’s policy has not translated into strong growth because banks have rebuilt profits and margins, rather than passing on low rates to their customers. Government needs to either force banks to lend properly to businesses in the social interest, or do so itself.
I urge the Bank of England to take the threat to pensions and savers more seriously and wake up to the dangers of the current ultra-low interest rate policies. We will not get strong growth if the older generation’s pensions are decimated. A generation of savers and those who did put aside money for future pensions will be damaged, which will cause future generations to mistrust savings. This policy also risks a crisis of confidence in the gilt market, which would ultimately cause far worse problems in future.
Punishing savers flies in the face of fairness, undermines pensions, discourages saving, risks high inflation and may cause misery for millions.