Pension savings: A key question about returns

The two key financial decisions that nearly all households have to make are related to a place to live (especially if this involves a mortgage), and the savings needed to have an acceptable income during retirement: pension savings. In a previous paper: “After the Great Recession: the Laws of Unintended Consequences” the writer sets outs the impact on U.S. mortgage holders as a result of the U.S. financial crisis of 2007-2008. This paper will explore the situation in the Eurozone countries (which share one base rate for the Euro, but have fundamentally different inflation rates and government bond yields) after first examining the links between the U.S. financial crisis and the pensions crisis in Europe. Pension savings, by their very nature, represent postponed expenditure. This raises a number of issues: what are the returns going to be? Should such savings be made in collective vehicles - like pension funds, either company or industry wide ones - or in individual accounts? Setting aside savings for future pension payments automatically affects an individual’s current spending levels. The reward for postponing current spending depends mainly on Central Banks’ and Governments’ economic policies. As will be explained in this paper, the main problem is that government bond yields no longer compensate for inflation levels in some countries. Pension savings are very much a national issue, rather than a Eurozone area one. Therefore national solutions need to be found, rather than pan-Eurozone ones. One option that will be explored is to compensate pension savers on their government bond holdings to a level equivalent of CPI levels plus 0.25%. The economic implications of this for both a central bank and a government will be set out in this paper. The Netherlands –as the country that in the Eurozone has the highest accumulated collective pension savings compared to its GDP- has been selected to show how this may work. As the current levels of interest rates are a consequence of the 2007-2008 financial crisis that started in the U.S., attention will first be paid to what was, and what was not, done to solve that crisis.