Is global aging about to end the savings glut? We think not.
A popular view holds that as the masses of Baby Boomers retire, they will not only save less but also start to dump their accumulated assets to fund retirement. If true, the real long-term equilibrium interest rate, which has been on a secular downtrend for decades, might start to rise.
In February, we challenged the timing of an aging-related demographic cliff in an In Depth report, “70 Is the New 65: Demographics Still Support Lower Rates for Longer.” Our core thesis: The people who drive the lion’s share of aggregate saving, the highest income earners, are working and saving later in life as longevity rises. This trend should continue fueling the savings glut – and should support a low global neutral interest rate well beyond our secular horizon of three to five years.
A spate of recent research supports our view that the “Death of the Savings Glut” has been exaggerated:
- In December, the Bank of England presented a demographic analysis that, unlike many we’ve seen, does account for a continued rise in longevity. This led the BOE to suggest that “there could be little-to-no reversal of the impact of demographic forces on global real rates in the years ahead.”
- In a February paper, the Brookings Institution highlighted that “as more Americans who earn high incomes continue to work longer, the gap between high- and low-income seniors tends to widen.” Rising inequality adds to the savings glut, as the well-off save considerably more than the less-well-off.
- In April, a working paper by the Federal Reserve Bank of San Francisco found a close link between longevity and interest rates: “An increase in longevity – or expectations thereof – puts downward pressure on the real interest rate, as agents build up their savings in anticipation of a longer retirement period.” This finding lends credence to our view that, for perhaps the first time in history, the greatest future risk retirees face may be longevity risk – or outliving one’s accumulated savings. (The authors’ simulation predicts that the real interest rate could fall “an additional 50 basis points over the next forty years ….”)
The aging of the Baby Boomers is not in doubt. But what this trend means for interest rates is open to debate. These recent findings reinforce our view that the savings glut is alive and well – and that the neutral rate will remain depressed.
Maybe we lowballed it. Perhaps 75 is the new 65.