Heilbroner Center Affiliate Teresa Ghilarducci argues that “permanent austerity,” not low interest rates, is to blame for low returns to retirement plans.
“Why maybe the Fed isn’t to blame for paltry retirement-plan returns”
Marketwatch, Published: June 13, 2016 3:28 p.m. ET
Experts at a conference sponsored by Pensions & Investments point to a different culprit.
By ANDREA RIQUIER
Central banks may deserve credit for saving the world’s economies – or at least arresting their freefall – during the financial crisis of 2008. But eight years later, are monetary policies left over from the emergency era crippling retirement plans and retirees?
That was the question posed by a panel at the Global Future of Retirement conference sponsored by Pensions & Investments in Washington Monday.
The question isn’t just academic: Pensions & Investments reported in January that the average return for 219 pension funds in 2015 was -0.08%. On Monday, Reuters reported that the California Public Employees’ Retirement System, the country’s largest public pension fund, announced its fiscal 2016 return was “likely to be flat.”
With interest rates near zero in the United States and below it in many other major economies, it’s easy to blame central banks. But panelists took a different view. It’s not monetary policy that’s crushing retirement returns, or even interest rates, they agreed.
“Weak fiscal policy will doom our collective project to fund pension promises with financial assets,” said Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School. Ghilarducci blames what she calls a “permanent austerity” push from the government that depresses demand across the economy.
That’s not just on the federal level, she noted. “The balanced budget requirements of state and local governments is permanent austerity, permanently contractionary.”
Stronger government spending could offset weak consumer and business demand, Ghilarducci argued. In fact, she argues the government should run permanent deficits.
But weak government spending also sets the tone for the other two sectors. The eurozone, where monetary policy has had to overcome a lack of coordinated fiscal policy, is the perfect example, she said. That’s why the bloc has had much weaker growth than other economies, and is now dabbling with negative rates and buying corporate bonds.
But U.S. policymakers could coordinate monetary policy with fiscal – they just don’t. “I do pity the poor Fed,” Ghilarducci said. “It’s pushing on a string.”
Read the full article on Marketwatch.