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Another Reason Pandemics Are the Retiree's Enemy

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COVID-19 is everyone’s enemy because it kills and frightens people, and because it has forced communities around the world to try to defend themselves by “sheltering in place.”

COVID-19 is the retiree’s enemy because the fatality right for older people who are hospitalized with the disease is very hard.

And COVID-19 could be the retiree’s enemy because it could be terrible for fixed annuity issuers, annuity benefits guarantee providers, bond fund managers, and anyone counting on income from a portfolio of bonds or other fixed-income investments.

Three economists — Òscar Jordà, Sanjay R. Singh and Alan Taylor — talk about the threat COVID-19 could pose to fixed-income investors in a new working paper published on the National Bureau of Economic Research website.


  • A copy of the pandemic consequences paper is available here.
  • An article about the effects of the 1918 influenza pandemic is available here.

A working paper is a research paper that has not yet gone through a fully peer review process.

Jordà is an economic researcher at the Federal Reserve Bank of San Francisco and the University of California at Davis.

Singh and Taylor are both at the University of California at Davis.

They started their research by looking at financial records for the periods around 15 pandemics that are believed to have killed 100,000 or more people. The earliest pandemic in their paper was the Black Death pandemic, which started in 1347, ended in 1352, and is believed to have killed 75 million people.

The most recent pandemic in the research was the 2009 H1N1 pandemic, which killed 203,000 people.

Other recent pandemics in the paper include the 1918-1920 influenza pandemic, which killed 100 million people; the 1957-1958 flu pandemic, which killed 2 million people; and the 1968-1968 flu pandemic, which killed 1 million people.

The researchers used data from six countries that have centuries of detailed economic data: France, Germany, Italy, the Netherlands, Spain, and the United Kingdom.

Here are five things Jordà and his colleagues say in the new paper.

1. Past performance is no guarantee of future results.

Jordà and his colleagues note that the effects of COVID-19 could turn out to be different from the effects of earlier pandemics, both because the economy is different and because COVID-19 seems to deadlier to people who are already retired.

Many of the earlier pandemics were more dangerous to working-age people, or about as dangerous to working-age people as to older people.

2. Pandemics  seem to lower interest rates for about 40 years after the pandemics strike.

Jordà and his colleagues found that underlying interest rates following pandemics in Europe held steady for a few years after the pandemics, then fell by about 0.5 percentage points to 2.5 percentage points below the expected, inflation-adjusted interest rates by a point about 20 years after the pandemics.

Average interest rates were still about 0.5 percentage points below the expected, inflation-adjusted rates 40 years after a pandemic ended.

“These results are staggering and speak of the disproportionate effects on the labor force relative to land (and later capital) that pandemics had throughout centuries,” the researchers write.

3. The effects of pandemics on interest rates differ from country to country.

Jordà and his colleagues found that pandemics had a big effect on interest rates in Italy and Spain, a medium-sized effect on rates in France and the Netherlands, and a modest effect in Germany and the United Kingdom.

The country-to-country interest rate impact gap “reflects, among other explanations, the timing of the pandemics across countries, the relative exposure of each country to the pandemic, the relative size of the working population, and how industrialized each economy was relative to one another,” the researchers write.

4. Interest rates may fall after pandemics because of the effects of pandemics on the supply of labor.

The researchers tested this idea by comparing what happened to interest rates after pandemics with what happened to wages.

“The response of real wages is almost the mirror image of the response of the natural rate of interest, with its effects being felt over decades,” the researches write. “The figure shows that real wages gradually increase until about three decades after the pandemic, where the cumulative deviation in the real wage peaks at about 5%.”

5. Wars are different.

The researchers used similar techniques to measure the effects of wars on inflation-adjusted interest rates.

Wars tended to increase interest rates, rather than reducing rates.

The effect of wars peaked around 20 years after a war, with a war increasing inflation-adjusted interest rates by an average of about 0.25 percentage points to about 1.5 percentage points.

If the researchers are right, and COVID-19 behaves like the pandemics in their research, it’s possible that COVID-19 could be hard on retirees who are counting on annuities or bond portfolios to pay their bills in the 2040s, and on life insurers and pension funds that are counting on fixed-income portfolios to support retirement benefits obligations in the 2040s.

But the pandemic could, possibly, be good for companies trying to capture working-age people’s wages in the 2040s.

— Read 5 Things to Know About 707 Years of Interest Rate Dataon ThinkAdvisor.

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