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Retirement Planning > Saving for Retirement

LTCI Watch: Fed versus older workers

By Allison Bell

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Spencer Jakab suggested in a column behind a paywall in the Wall Street Journal that the United States might have a “wageless recovery” in the job market right now partly because of the damage low interest rates has done to older workers.

Reporters at the Wall Street Journal and other news organizations aimed at general audiences, and general business audiences, tend to write about low interest rates as if they were a free, low-risk way to make economies perk up quickly.

The prevailing view of moves to hold interest rates low is that the only noteworthy danger is the possibility that low rates could lead to an increase in price inflation.

See also: European life insurers face unsustainable business model

Jakab dared to mention another concern: an estimate by Swiss Re (which is, of course, an insurer; fancy that) that Federal Reserve Board efforts to keep U.S. interest rates low may have cost U.S. savers about $470 billion in lost interest income from 2008 through 2013. “That burden falls disproportionately on older households,” Jakab writes.

He also points out that the labor-force participation rate for workers ages 55 and older has risen 3 percentage points in the past 10 years. In other words: Many older workers may be working because low interest rates took away some of their retirement money.

See also: Will there be a raise in interest rates? 4 midyear market trends to watch

Of course, distinguishing between the effects of Fed policy and investors’ choices on the interest rates portfolios earn can be complicated. But I think it’s clear that low rates have had many subtle bad effects on older workers — the traditional buyers for long-term care insurance (LTCI) — in addition to the obvious effects on older workers’ income from savings, older workers’ returns on investments, and the performance of the pension funds and insurance companies that are supposed to get older workers through retirement.

One is that the current combination of low interest rates and high credit standards is destroying the kinds of jobs older workers might like to hold.

The current climate strongly favors publicly traded companies over family-owned businesses, by setting borrowing rates near zero for publicly traded companies, and close to infinity for the owners of the small and midsize family-owned businesses with owners who might, 20 years ago, have bought LTCI for themselves, or even considered paying some of the premiums for true group LTCI plans for their workers. Many of those owners are 55 or older.

Partly because of the uneven flow of credit access throughout the economy, and the lousy state of information of about the credit haves and have nots, many of the companies that have gotten loans have done so using what have turned out to be unrealistic growth projections. To compensate for weak or erratic revenue growth, they’re facing pressure to outsource what once were nice, steady, unglamorous office jobs, to show the lenders how they will fatten profit margins by cutting costs. That pressure to outsource previously secure office jobs is hurting many older workers. 

The low rates are also slashing returns on endowment investments. Traditionally, some of the core buyers of LTCI have been university professors, and workers at other types of nonprofit organizations. These days, any older workers at nonprofit, endowment-supported organizations are in the Fed’s crosshairs. The low rates are strangling their employers.

See also: Fink sees low rates eroding growth as consumers focus on saving

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