Ros Altmann argues for supporting pensioners who have been negatively impacted by monetary and fiscal policy since 2008. She highlights the distributional inequities of the Bank of England’s policies in dealing with the economy and calls for more consideration for pensioners who are seeing their savings dwindle

Altmann, Ros

English

LSE Research Online

blo gs.lse.ac.uk http://blogs.lse.ac.uk/po liticsandpolicy/archives/26929Cre d it: Imag e s_o f_Mo ne y (CC-BY) viaFlickr (alte re d )Average household incomes for UK pensioners are reducingeach year due to harmful government reforms and the Bankof England’s monetary policiesRos Altmann  argues for supporting pensioners who have been negatively impacted bymonetary and fiscal policy since 2008. She highlights the distributional inequities of the Bankof England’s policies in dealing with the economy and calls for more consideration forpensioners who are seeing their savings dwindle.Conventional thinking is that pensioners have escaped unscathed f rom governmentmeasures to reduce the f iscal def icit, but this is a myth. The combined impact ofgovernment changes to pensions and benef its alongside the Bank of  England’s monetarypolicy measures, are reducing average household incomes f or UK pensionerssignif icantly each year. It is important to consider the distributionalconsequences of  policy more caref ully, since policymakers seemunaware of  the impacts had on older generations.The government says it has protected pensioners but research f romthe Centre f or Economics and Business Research (Cebr) shows thisis not the case.A brief ing note by the Institute f or Fiscal Studies (IFS) in March 2012misleadingly suggested that pensioners actually benef it f rom tax andbenef it ref orms. This has lured polit icians into a f alse sense ofsecurity but they ignore this impact at their peril. Pensioners may notdemonstrate on the streets but they do vote.To be f air, until 2011,  f iscal policy had been relatively benign f orpensioners. From 2011 onwards, however, in addition to the ef f ectsof  monetary policy, pensioners will suf f er f urther as f iscal policiesstart to bite, including f reezing or abolishing age-related allowances,cutting the winter f uel payment and reducing the savings creditelement of  Pension Credit. Even government’s “triple lock” pledge to increase state pensions by thehighest of  the Consumer Price Index (CPI), earnings growth or 2.5 per cent will leave pensioners worseof f  that under than the previous f ormula based on the Retail Price Index (RPI).In addition, since 2008, monetary policy has had a negative impact on older generations.  This has ledthem to reduce spending as they f ear f or their f inancial f utures in the f ace of  f alling interest rates, lowerpensions and savings income, plus high inf lation.The f indings of  two research papers were recently presented at a Saga Thought Leadership event. Thepapers analyse how the over 50s in general and pensioners in particular have been negatively impactedby the Bank of  England’s monetary policies since 2008 and f iscal changes since 2011.Record low interest rates, f alling annuity rates and rising inf lation have signif icantly reduced nominal andreal savings income and eaten away at the f ixed incomes of  annuitants. Even the state pension hasf ailed to keep up with rises in pensioners’ cost of  living, as of f icial measures of  pensioner inf lation sinceNorthern Rock f ailed show prices f or the average household rising by 16 per cent, while pensionerinf lation has been 26 per cent cumulative. As pensioners spend more of  their money on f ood and energy,they have less to spend on going out or travel and entertainment, which has a wider economic impact onjobs f or younger people. This is another source of  downward pressure on the economy as a result ofQE.According to calculations by the Bank of  England, its policies have taken away £70 billion f rom saverssince 2008. The majority of  savers are older generations, who have paid of f  their debts and need to liveof f  their lif e savings in retirement. However, with an ageing population, just as record numbers arecoming up to retirement, policy has reduced their income. The Bank of  England’s policy of  quantitativeeasing (QE) has diminished pensioner income, both by pushing up inf lation and slashing annuity rates,which determine the pension income f or lif e when purchased at retirement.QE was designed as an emergency measure to f ight def lation, expand the economy and boost spending.However, by lowering older people’s income, whether savings income, annuity rates or income drawdown,it has actually taken spending power out of  the economy.Monetary policy is acting like a tax increase by lowering income. This leads pensioners, savers and thoseapproaching retirement to cut their consumption. 21 million over-50s make up more than half  of  UKhouseholds and nearly half  of  all private consumption spending. If  their incomes are being reduced, theywill cut their spending.The Bank of  England says borrowers have benef itted by £100 billion, which should stimulate theeconomy. However, if  borrowers do not increase their spending and banks do not increase lending, the£100 billion will not necessarily boost growth.There are several reasons why monetary policy may not be working as economic theory would predictand why a policy that would normally be considered expansionary is actually having the opposite ef f ect:Borrowers are so hugely over- indebted that f alling borrowing costs do not lead to higherspending. Instead they repay more quickly to bring themselves back to a more sustainable f inancialposit ion;Banks are impaired by their own bad debts, and are using extra deposits f rom QE gilt-buying toboost their balance sheets rather than lend;Weakened banks have become ultra-cautious about who they lend to whilst charging huge f eesand imposing draconian terms. Indeed credit card and lending rates are now higher than in 2008;In an ageing population, cutting savings and pensions income does not lead them to stop savingas the Bank would have predicted. Worried about their f uture as they approach or f ind themselvesin retirement, those of  pensioner age actually cut spending as high inf lation adds to the pressureof  f alling incomes;The UK pension system is underpinned by gilt yields, so QE has reduced pensions andaggravated pension def icits. Companies have to divert money to their def icits and f ind it harder toobtain f inance.Pensioners with savings and the most recently retired are “the biggest losers” according to this Cebrresearch. The record number of  pensioners reaching 65 will be poorer permanently as they lock in to thecurrent low annuity rates and f ace f iscal pressures f rom the abolit ion of  age-related allowances. Manypensioners do not have time to wait, and will not benef it f rom any f uture upturns in the economic cyclewhich may see interest rates rise later. Once they have bought their annuity, it can never change.Even pensioners who chose to avoid annuities and opt f or income drawdown have been trapped by lowannuity rates limiting the income they can withdraw.I hope that the Bank will take this analysis seriously rather than dismissing as “nonsense” the idea that apolicy which boosts inf lation can damage growth. Af ter three years of  0.5 per cent base rate and threerounds of  Quantitative Easing the UK economy is still in recession. At the same time inf lation is stillabove target. It is theref ore important to question whether current policy may be having unintended side-ef f ects that are undermining its ef f icacy.Closer examination of  the distributional ef f ects of  policy may help explain why policy is not working asexpected. It is a debate that needs to be had.Note: This article gives the views of the authors, and not the position of the British Politics and Policy blog,nor of the London School of Economics. Please read our comments policy before posting.About the authorRos Altmann  is Director General of  Saga Group Limited.You may also be interested in the following posts (automatically generated):1. Can the Chancellor still inf luence voting patterns in the Monetary Policy Committee at the Bank ofEngland? (35.5)2. The Bank of  England’s second round of  quantitative easing may do litt le to improve economicconf idence or to encourage bank lending, and may even lead to more upward pressures oninf lation. (28.5)3. According to new research, low interest rates and expansionist monetary policy may temper thegovernment’s programme of  austerity (27.1)4. The recommendations of  the Hutton Report will protect workers and pensioners, but we mustcome to terms with retiring later (25.8)

Average household incomes for UK pensioners are reducing each year due to harmful government reforms and the Bank of England’s monetary policies

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