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LTCI Watch: Washington's trash stinks, too

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President Obama addressed a crowd at AARP Monday and, apparently with a straight face, made unscrupulous financial advisors out to be the nation’s retirement savings bad guys.

Going off a written version of his remarks provided by the White House, he talked about how some terrible advisor conned a nice Illinois couple into buying a lousy annuity. He said the husband in the couple was in a nursing home and unable to get to the money locked into the annuity.

At least in the written version of his remarks, he never mentioned the possibility of using a suitable annuity or insurance policy to help prepare for retirement income and long-term care (LTC) expense needs.

Another point he didn’t make is that, no matter what challenges private long-term care insurance (LTCI) might face in the future, a couple that bought a good LTCI policy 10 years ago and needed the benefits today might be a lot better off than a couple that had no LTCI.

A third point he failed to make is that the main reason to use an annuity, life insurance policy, 401(k) plan or other relatively complicated, scary arrangement to save for retirement is to make our money illiquid. If we less-than-perfectly-self-disciplined people of the world depended entirely on liquid checking accounts, savings accounts and money market accounts to save for retirement, we’d soon blow the money on lattes and trips to Florida. Maybe all annuities should include provisions that make the cash available when holders enter nursing homes; maybe there are complicated situations in which lack of easy access is helpful.

I have no opinion about the annuity that the couple in the anecdote bought, or the new retirement advice regulations the Obama administration has proposed. Maybe the annuity the couple bought was so unsuitable it gave off poisonous vapors when left in a closet for too long. But, in general, it seems unreasonable to buy an annuity partly for the benefits associated with its lack of liquidity, after signing many forms acknowledging that it’s illiquid, then complain about its lack of liquidity.

Meanwhile, the elephant dancing the Macarena behind President Obama was the reality that one of the main enemies of aging Americans’ financial well-being is low interest rates.

Some say that rates are low because demand for loans is low. Others say that the Federal Reserve Board has broken the debt markets by jerking rates up and down like a yo-yo in an effort to keep holders of adjustable rate mortgages and FDIC-insured retail banks afloat. Others say the Fed is stuck using the interest rate yo-yo to keep civilization going because members of Congress refuse to make tough choices about how to narrow the gap between the post-retirement income and health benefits we’ve promised the Baby Boomers and the benefits we’ll actually be able to deliver.

Still others say that, even if Congress has put the Fed in a tough position through an inability to make tough decisions, and the underlying demand for loans is really weak, Congress and Fed policymakers have contributed to weak underlying loan demand by defining every potential borrower who actually needs money, and isn’t borrowing it for fun, as an undesirable.

Still others will say, “Look at the Great Recession. The last thing we need is letting people who need money borrowing money.”

So, OK, the rate situation is complicated. It’s hard to know who exactly deserves what portion of the blame, and it seems as if the true goal ought to be to figure out how to make the future work better, not to get angry about what people have done in the past.

But, all that said: Ultra low rates have done far more damage to retirement savers and the companies trying to serve them than a million unscrupulous, wickedly incentivized financial advisors ever could. The low rates let retail banks, blue-chip corporations and adjustable rate mortgage holders use a dollar that was supposed to go toward sustaining older people 20 years from now to pay for 10 cents of emergency rescue today. A casual glance around town suggests that little of the money is going into anything that will make our society physically more sustainable. Maybe Paul Krugman is right, and government budget deficits themselves are unimportant, but how can encouraging money to flow into phone app fads, shoddy McMansions, shoddy apartments built in obvious flood zones, and blocks of bank branches, fast food restaurants, old-fashioned doctors’ offices and drug stores (more drug stores! more!) possibly be getting our country ready to handle the aging of the Baby boomers? I guess that, in the 2030s, we can turn the ruins of the shuttered big box stores we blew the low-rate 2010s money on into Boomer nursing homes, but that doesn’t sound like the foundation of a great Boomer LTC supply plan to me.

So, the artificial low rates are helping us squander future wealth that could, at least temporarily, be going to improve necessary infrastructure, or to corporate bond issuers with ideas for products and projects that could make us more sustainable. And the Fed board generally doesn’t even acknowledge the damage it’s doing to savers and insurers. For the Fed, savers seem to be somewhat less than fully human. Some financial advisors may have incentives to sell savers questionable products, but the Fed seems to have no incentive whatsoever to acknowledge that savers exist.

And Obama is the head of a government that’s somehow involved in this situation. Maybe it created this situation. Before he goes around pointing fingers at financial advisors, he ought to take a hard look at how the federal government has contributed to this financial system mess and think of ways to reform the misaligned incentives shaping the government’s decisions.