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LTCI Watch: Shell game

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Antony Davies — who actually has a doctorate in economics, not the punity little bachelor’s degree in economics that I have — and James Harrigan have written a great article for Forbes in which they talk about how mean the current low interest rate environment is to older Americans.

Talking about how low interest rates affect wealth and well-being is hard for  a deadline slave me because, let’s face it, I have thoughts about this sort of thing because I have a deadline to meet, and it just seems to be an obvious thing to think about.

In 2008, my husband asked me, “When the stock of XYZ company goes down, and they say the company’s lost $10 billion in value, where does the $10 billion go? Who gets the $10 billion? Why can’t I have the $10 billion?”

When interest rates go, what money goes where? Does any money really go anywhere? Who wins?

It’s like a shell game with virtual shells and a virtual ball.

I tried to figure this stuff out myself. I went through the Census Bureau wealth information today and found that getting clear information about how seniors’ net worth has changed over the past decade is hard. The government posts plenty of data in a one-year-at-a-time format, but not much time series data.

Davies and Harrigan did a better job of finding and crunching the numbers than I could. They found that seniors’ median net worth grew an average of 11 percent per year from 1998 through 2005, then fell an average of 2.8 percent per year from 2005 to 2010.

A drop in home values seems to have had a fairly small impact on seniors’ wealth over that period, Davies and Harrigan say.

Instead, they say, seniors seem to be suffering because the low interest rates are forcing them to invest in riskier investments, to try to increase their yields, and because the seniors end up earning less when they do keep money in high-rated bonds.

Of course, the low rates are causing similar problems for the portfolio managers responsible for investing the assets that back long-term care insurance (LTCI) businesses, long-term disability insurance businesses, and other insurance businesses that tend to insure against costs likely to last for many years, or to occur many years in the future.

Davies and Harrigan then provide an interesting number. They say the U.S. government would have to pay an extra $500 billion per year if interest rates went back up to normal levels.

Of course, in the real world, the government is probably getting a lot of that  money from college endowments, ordinary corporations, the yacht money of young rich people,  and other individuals and entities that are not older people and are not organizations that focus on meeting the needs of older people.

But a huge percentage of that $500 billion must be coming out of the hides of pension funds, individual retirement savings, and LTCI portfolios.

The government is actually using up some of the money older people will need to keep themselves alive to keep itself alive today.

In other words: In a financial, metaphorical sense, the government is cannibalizing older people.

In a financial, metaphorical sense: Soylent Green already is people.

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