A lament for savers

BORROWERS get bailed out. Run your bank into the ground and the taxpayer will lend it money. Buy a house you cannot afford and the central bank will cut interest rates to ease your burden.

Meanwhile those who have lived within their means and put money aside for the proverbial rainy day, have seen interest rates slashed to 2% in the euro zone, 1% in Britain and virtually nothing in America. No one offers to help them out, even though saving is needed to allow business investment which, in turn, generates growth. Asians, told off in the 1990s for their current-account deficits, now get lectured for saving too much.

This is quite a different paradox of thrift from the usual one. In theory, everybody regards thrift as a virtue. In practice, they treat it as a vice.

Of course, politicians and economists will argue that they are only talking about the short run. They need people to spend to lift the economy out of recession. As John Maynard Keynes remarked: “Whenever you save five shillings, you put a man out of work for the day.”

One could argue that savers should do well in the event of outright deflation. Nominal interest rates may have fallen sharply. But they cannot fall below zero. So in a world of falling prices, real rates will be high.

Nevertheless, savers are far from content. Those who have built diversified portfolios (another hallmark of prudence) will have suffered losses in equities, property and corporate bonds. Even those who have been clever enough to keep their money in cash have had to fret about the security of banks and money-market funds.

In any case, the community of savers is a diverse one. Take the many elderly people who depend on their savings for retirement income. When interest rates fall as quickly as they have in recent months, their income falls, and they will be forced to spend less.

The retired do not have the option of making up lost income. They are too old to work, or companies may not consider them employable. They could take more risk by moving into corporate bonds or equities. But that strategy incurs the danger of a permanent loss of capital.

In many countries the system is biased against the saver. Interest income is usually taxable, whereas some countries allow mortgage payments to be tax deductible. In Britain state benefits are means-tested. An elderly person with more than £22,250 ($32,000) in savings, hardly a golden nest-egg, has to pay the full cost of nursing-home care, which can easily exceed £40,000 a year. Those Britons who have saved money in the form of a personal pension must turn the bulk of their pot into an annuity by age 75; if they drop dead at 76, the insurance company keeps the lot.

Another group of savers are those who are planning for retirement (or other events such as children’s weddings or education fees). They have to make a complex series of calculations. What is their future liability, and what return can they expect?

Recent events will make such people want to save more, not less. Say you wished to buy a retirement income of $25,000 a year by investing in ten-year American Treasury bonds. In the summer of 2007, you would have needed a sum of $476,000 to get that result. But bond yields have plunged since then. Generating the same income would now require a sum of $833,000. And, with yields as low as they are, you would have to put more aside from your income to reach any targeted level of capital.

In theory, of course, long-term returns from risky assets like equities should be much higher now than they were 18 months ago, because of the fall in valuations. But few savers will be brave enough to make that bet.

Indeed, those saving for retirement have another problem to worry about. A much-discussed trend of the past ten years has been for employers to switch from final-salary to money-purchase pension schemes, transferring the investment risk to the employee. Less well advertised is the fact that the shift has allowed employers to cut the overall level of their contributions, and the financial crisis has prompted some to impose a moratorium on payments.

Rationally, therefore, many workers should be saving more for their retirement right now. And that is before they consider building up a cash cushion against the risk of losing their job, or rebuilding their wealth to offset falling house prices.

Such people will be prudently preparing for the future, with the aim of not being a burden on the state. And they will get no thanks for it whatsoever.