Here is a diagram of things disliked by the young and the old, that may or may not reveal more about this Bloomberg writer's psyche than about the actual state of the world. Still, few would argue that the negative interest rates imposed by a handful of central banks around the world have failed to endear themselves either to an older generation increasingly composed of savers or to their children, who seem doomed to make up the shortfall in the older generation's low returns.
The latter point is highlighted by Citigroup Inc. Chief Economist Willem Buiter, who parses the deleterious effects of sub-zero benchmark interest rates on pension funds, life insurers, and, yes, intergenerational harmony in a research note published on Monday.While negative rates wreak havoc on old people's savings and pension plans, they can be even more problematic for young people who are left holding the bag of unsustainably generous benefit plans amid sluggish economic growth and newly-created austerity drives, he says.
"There is no painless solution to the problems created by the decline in the neutral real interest rate and the associated decline in risk-adjusted expected rates of return. Someone will be worse off than expected, hoped for or promised," says the economist. He notes that a portfolio with a 4.5 percent target rate of return carries with it the same risk for an asset manager in Europe or Japan as a portfolio with a target eight percent return did before the financial crisis.
With low rates eating into portfolios, retirees are left with few options to maintain their expected standards of life after ending work. They can invest in riskier assets (a potentially unpalatable decision given the need to preserve capital in one's later years), resume employment (ugh), accept a lower standard of living (aaarghh) or find a sucker to fund the shortfall.
That sucker is increasingly the younger generation under pressure to fund the excesses of its predecessors while arguably lacking the benefits that they once enjoyed. Moreover, they are up against a demographic block which vastly eclipses them in terms of sheer electoral power; "Increasingly the old are 'outvoting' the young. Austerity aimed at maintaining or restoring government solvency in the euro area has disproportionally hit the young," writes Buiter.
Few would argue that the solution to geriatric economics is for central banks to raise rates — that risks prompting a recession and curtailing economic growth to everyone's disadvantage — but neither can the shifting burden of negative rates and lower returns be ignored.
"Savers – the old – are likely to recoup their losses due to negative interest rates from younger generations," concludes Buiter. "We are likely to see a continuation of this pattern of intergenerational conflict as the old gear up to defend their standard of living in the face of secularly low rates of return on saving. It seems questionable that Wordsworth would have said of the decade to come that 'Bliss was it in that dawn to be alive, But to be young was very heaven.'"