Low interest rates and low inflation are here to stay, says author and actuary Fred Vettese.
And that’s going to profoundly affect our investments, how much and how long we save and our retirement expectations, he adds.
For the present generation of retirees, or those nearing it, the implications may be less urgent that for those in their 20s on up, Vettese argues in his latest book The Essential Retirement Guide: A Contrarian’s Perspective. (Wiley, $27.95)
Vettese is chief actuary at Toronto benefits consultant Morneau Shepell, where his former boss Bill Morneau was CEO, but is now the federal finance minister. In 2013, the two collaborated on a book called The Real Retirement which argued that most of us are better off than we think and we should worry less about the future than we do.
In this sequel, written alone, Vettese picks up the theme, but digs a little deeper into what lies ahead.
He still thinks we should dial down our retirement anxiety, since most of us will be fine. But for younger workers there is a longer work life in store. They’re going to be healthier and live longer and so must fund a longer retirement life. But they shouldn’t fret either. It can be done with a little discipline.
One of the big insights in this readable book is an answer to the riddle of our low interest rate trap. Central banks have printed money by the billions in the last seven years, pushing interest rates down to record lows. But nothing has happened — no growth and no inflation.
That should not be the case.
The answer lies in demographics, Vettese said in an interview. And those demographics are going to shape the foreseeable future as the ratio of those spending and those wanting to save reaches a tipping point in the industrial and developing world.
Older consumers have all the houses and furniture they need. Their mortgages and household debt are falling. They’ve shifted to saving from spending. Behind them is a much smaller demographic who may be spending, but without the same power of numbers.
That means less demand for things to buy, and more demand for stocks, investments and other forms of saving.
“The aging of the population has been slowly changing this balance for the past 25 years,” Vettese says.
The trend became evident in Japan in about 1990 when their housing bubble burst. The economic miracle of the 1960s and ’70s gave way to the stagnation of the ’80s and ’90s.
Why in 1990? Because the cohort born at the end of World War II turned 45 and the shift from spending to saving began to pick up steam.
Rounds of interest rate cuts haven’t helped lift Japan out of its malaise.
Vettese says that is because the rate cuts create a paradox. When more people want to save than spend, lowering rates doesn’t encourage them to buy anything. It forces them save more, for a longer time to get the return they need.
The tipping point in Europe and Canada came in 2010 in the middle of the financial crisis, he says,and it is just arriving in the U.S. China’s turn is in ut five years when the impact of its one-child policy introduced in 1978 becomes evident.
Vettese says throughout the 20th century populations grew at a steady pace and lifespans stayed about the same. That meant a higher ratio of borrowers to spenders, fuelling economic growth.
The one-two punch of longer lifespans and a global decline in fertility rates, has changed that. Fertility rates are the average number of children born per woman. Vettese says the fertility rate in Brazil and China in 1960s was close to six. It is now 1.9 in Brazil and 1.6 in China. So more older people and fewer younger ones.
The trends are “bad news for retirees,” he says.
With interest rates so low, more people are turning to stock markets. As more money chases the same blue chip stocks share prices rise, but dividend increases, which are based on profits, can’t keep pace, so yields fall. He expects that to continue. It may also lead to huge market swings.
Nor does Vettese see an easy way out. He believes an expansion of the Canada Pension Plan is a way the government can help young Canadians retiring in 30 years.
He says the simplest solution is to double the definition of the maximum average industrial wage used to calculate the benefit. It is currently $53,600 a year. Raise it to $100,000 and premiums need not double. It would provide a better benefit to a maximum of about $2,000 a month, rather than the current $1,065, he says.
Here are some of the book’s other findings:
• Long-term care insurance isn’t worth it.
• You can probably live comfortably in retirement on 50 per cent of the income you had while working, not the 70 per cent often quoted.
• House prices will not rise at the same rate because rates can’t drop much more and may rise a little. Add to that low inflation. Markets like Toronto and Vancouver are harder to predict because of the influence of foreign investors.
In the end, Vettese holds to his earlier thesis: that we should worry less and live more. By saving too much for the future, we rob the present and who knows what tomorrow may bring.