Inflation and rising rates mean many future retirees could earn less than they had thought
to retire? The answer to this is much more likely to be no today than it was a year ago—especially for those old enough to ask themselves the question. The resurgence of inflation is eroding the real value of savings. Higher interest rates have caused a repricing of bonds and stocks. The result is that the pot of assets many future pensioners are hoping to live off has shrunk.
This impoverishment could fast become reality for millions. A lot of baby-boomers turned into pension-boomers in 2021. The Federal Reserve Board of St Louis reckons there were 3.3m more retirees in October 2021 in America than 20 months before. More than half of Americans over 55 have retired from the labour force, up from 48% in the third quarter of 2019, according to a survey by the Pew Research Center, a think-tank in Washington,.
Public-sector employers have had much less success in reducing their exposure to those overgenerous products, however. The result is that around $13trn of defined-benefit assets are managed by state, local and federal governments. Many of the biggestschemes, and some of the biggest pension funds in existence today, are run by public institutions, such as the California Public Employees’ Retirement System and the Ontario Teachers’ Pension Plan .
Still, it is the other two levers—the value of the investment pot and the discount rate—that decide whether funded ratios soar or sink. The easiest way to run a pension is to match assets with liabilities, by buying long-term bonds that pay out when pensioners come knocking. If yields on American government bonds are the benchmark, say, then the pension manager might simply buy lumps of them.
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