Olivia Mitchell is a well-known professor of insurance, business economics, and policy at the Wharton School of the University of Pennsylvania. Each year, she hosts a conference at which other world-famous economists, fiscal experts, and portfolio managers examine long-term trends in the marketplace and how they affect retirement.
This year’s conference, which took place Thursday and Friday, was a bit sobering, but we came away with some fascinating nuggets about what to expect in stock and bond markets and the outlook on interest rates.
Short answer: lower, for longer than we might expect.
Said PIMCO’s Esteban Burbano, a Wharton alum: “We are living in a world now of more subdued economic growth, a lot of debt, and muted inflation, which we call ‘the new neutral.’ We expect this to continue for the next five to seven years.”
On why bond yields remain so low: “There’s just a lot of demand for high-quality bonds, which means the U.S. [Treasury market] is still attractive. That’s keeping the yield on the 10-year Treasury muted” at about 3 percent, and “that’s likely to continue.” Falling yields challenge retirees to meet their needs from investment portfolios alone, he added.
Julia Coronado, former chief economist at Graham Capital hedge fund and now founder of the firm MacroPolicy Perspectives, noted that since President Trump has been in office, he’s changed his tune about the Federal Reserve and central bank chair Janet Yellen.
“Trump’s now very much in favor of the punch bowl, unlike during the campaign,” she said, noting that he reversed an earlier call for raising interest rates, saying last month that he “likes low interest rates and that the dollar is getting too strong. Trump is not aligned with the GOP [on rates] but with populist punchbowl politics,” which calls for lower rates for longer, she added.
That’s challenging retirees to save more to offset the lack of income. “Consumers have been saving more for the duration of the recovery,” Coronado said. "They get the joke."
Because of America’s aging population, "we’ll have more demand for bonds. The long-term trend for bond yields in the past 100 to 150 years has historically been between 2 and 6 percent annually," Burbano added.
“So many pension plans are thinking of past returns from the most recent 30 to 40 years, in which bonds returned 7 percent or 8 percent or even higher,” but that’s an anomaly in history, he said. “The average historically has been 4 percent.”
PIMCO also expects muted returns in equities over the next 10 years, about 5 to 5.5 percent annually.
Michael Finke, dean of the American College in Bryn Mawr, started his presentation, titled “Low Returns and Optimal Retirement Savings” by joking, "This is really going to depress you.”
He confirmed other studies showing that wealthy Americans live longer, with the richest 10 percent of the population living an average of 5.9 years longer. Well, lucky for them — they can afford a longer retirement.
“Since the post-Mad Men era, when American males quit smoking, they’re now drinking kale juice smoothies every morning and jogging,” he added.
Financial assets are becoming more expensive, Finke noted.
“To buy one dollar of inflation-adjusted spending, the cost has doubled between 1982 and 2015,” according to research he’s done on buying annuity income, for example. He, too, estimated that, after inflation of 2 percent annually, real returns on bonds are closer to zero, and equities return roughly 2 percent.
“So in a low, 3.5 percent return world, you have to save 14 percent of your income annually to retire,” Finke estimated.
Mitchell, for her part, presented a coauthored paper showing that low interest rates are actually prompting Americans to wait longer to take Social Security benefits.
“Claiming ages rise on average, the lower the risk-free interest rate. In other words, when the long-term interest rate falls to zero, women claim later by about 0.4 years, and men by almost a full year,” Mitchell noted.
That’s because, when expected investment returns are high, workers can claim early Social Security benefits without needing to withdraw as much from retirement assets, which continue earning higher returns for a while longer. When real interest rates are low, American workers can delay claiming Social Security in exchange for higher lifelong benefits, Mitchell argued.
Answers? Even the roomful of economists and experts meeting on the eighth floor of Wharton’s Huntsman Hall ultimately came to commonsense conclusions.
Retire later, work longer, said John Sabelhaus, economist with the Federal Reserve.
“That may be the only solution,” he said.
Download the conference's research papers at pensionresearchcouncil.wharton.upenn.edu/conferences. The password is PRC2017.