Falling interest rates, coronavirus threaten retirement security
The coronavirus pandemic, income inequality and a record level of public debt are worsening retirement prospects in the U.S. and globally, with of the biggest threats to retiree wellbeing being low-to-negative interest rates.
The chances for a financially secure retirement depend on a fragile balance of social, economic and public health pressures, according to the 2020 Global Retirement Index from Natixis Investment Managers.
One major concern is the long-term impacts of the recession on savings, as the speed and severity of the global economic slowdown stemming from the COVID-19 outbreak are greater than those in recent recessions. Measures taken during the pandemic to cover income shortfalls can dampen the savings needed for future retirement security. For example, employees may make hardship-based early retirement withdrawals that are never replaced, and employers may reduce or suspend matching contributions to defined contribution plans — steps that may become permanent.
“The COVID-19 pandemic, economic crises and other issues that have come to light this year have intensified longer-term threats,” says Edward Farrington, head of retirement strategies at Natixis Investment Managers. “It will be important for individuals, employers, institutional investors, asset managers and policymakers to plan for how they will take on the challenge of retirement security in the years and decades to come.”
The index — which provides a snapshot of the relative well-being and financial security of retirees in 44 countries — examines 18 factors that influence retiree welfare across four categories: finances in retirement, material well-being, health and quality of life. Natixis’s analysis of multi-year index trends suggests that the pandemic and policy actions taken to moderate its economic impact will have lasting implications for retirees.
Retirement security in the U.S. and developed nations around the world are now facing elevated threats of lower interest rates, record levels of public debt, recession, income inequality and climate-related natural disasters such as wildfires and hurricanes, according to Natixis Investment Managers. Such disasters also have financial implications, including higher insurance costs, increased food expenditures as crops fail, and greater housing expenses as storm severity grows.
“Balancing the needs of current and future retirees with other public policy demands has long been one of the most intractable issues for nations around the world, and the global pandemic and its economic fallout have only compounded the challenge,” says Jean Raby, CEO of Natixis Investment Managers. “Individuals, employers, institutions, policymakers and asset managers all have an important role to play in addressing these issues.”
In this year’s index, the U.S. remains in the top 20 rankings, climbing two spots to 16th — just after Finland and before the United Kingdom. The top three nations worldwide in this year’s index are unchanged from 2019, with Iceland in first place, Switzerland in second and Norway third. In fact, stability at the top is the norm: Nine of this year’s top ten countries have been in the top ten for each of the past two years.
The only nation to depart from last year’s top ten is Sweden, which dropped from fourth place to 11th. Sweden’s steep decline resulted in part from poor performance within the finances category as its decreasing five-year average for real interest rates — a concern for retirees on fixed income — moved into negative territory.
The index found that low interest rates represent one of the greatest threats to retiree security, as 16 of the countries moved to negative rates. Interest rates in the major economies in North America, Europe and Asia have trended downward over the last four decades, and negative interest rates have become an ongoing trend in the last few years.
When the economy and markets are in crisis, adjusting interest rates are a tool for central bankers looking to stimulate spending and get markets moving, but the cuts raise the stakes on retirement security, Farrington says.
“From an individual perspective, low rates are generally good because it costs less to borrow money, but, for retirees, negative rates magnify the problem they face in generating income from investments,” he says. “The implications of negative interest rates likely will continue to affect retirees for many years ahead.”