The negative interest rate is a threat to our pension

The negative interest rate is a threat to our pension

18 July 2019 from Anna Svahn

Usually, when discussing the problem of low or as in Sweden's case - minus interest rate - many people defend the current monetary policy by contributing to increased consumption and growth, that more people can afford to buy housing and that it is simply good for economy as a whole. More consumption leads to more growth, and everyone is satisfied.

The problem of negative interest rates, however, extends much further than growing debt mountains, both in the private sector and for companies and entire states. In Sweden, indebtedness is high, and in recent years, household debt has risen faster than both income and GDP. Mostly mortgage loans.

 

 
Just indebtedness says Stefan Ingves and the Riksbank constitute the biggest threat to the Swedish economy. Thus it is not possible to raise the interest rate either. The problem, however, is that with continued low interest rates, indebtedness also continues to rise, so we have rolled a snowball out a mountain and it does not seem like it is about to stop in the near future.
 
However, increasing indebtedness is only one of several problems when we look at the way in which the minus interest rate affects us in the long run. For it is not just that the minus interest rate stimulates the economy and leads to increased growth and in turn high indebtedness, there is a darker backside than that. Instead, if we look at total global debt, $ 13 trillion, or 25% in bonds with negative interest rates. It's a doubling since December last year. In Germany, it looks even worse, where the same figure is 85%.
 
Then maybe someone asks whom it really is who buys this type of bond? Who wants to take a financial risk and safely lose money? Unfortunately, the answer is as boring as frightening - pension funds. Today there are rules that say that pension funds must place part of the capital in government bonds because it is considered to be the least risky asset. The problem is just that this type of allocation ensures that part of the portfolio will lose money - your money.
 
What can one as private savers do to protect their future on older days? First and foremost, you need your own savings, and how it should be distributed depends a little on how long you have left before you retire.
 
If you have 20 years or more before it is time to stop working, there is reason to withdraw the risk in your savings. Then 100% equity funds could be a good alternative, spread across several different geographic markets to spread the risk. With less than 20 years left, it is a situation to reduce the risk in the portfolio, but since interest-bearing paper is not an alternative in today's low-interest environment, one should instead invest in other options.
 
For those who are not interested in actively managing their money but want to be able to sit back and let the portfolio handle the job, as an alternative to interest rates, one can choose to either just let a part of the portfolio be liquid, but then against SEK, or buy some gold and let another part be exposed to the USD. Being only exposed to SEK in the possibly liquid part of your portfolio means that you are not protected against the in our case unfortunately weak currency.
 
In conclusion, it is time for us to wake up and realize that the pension system we hoped to rely on may fail us. In order to avoid being one of those who hardly survive with decent pension, it is time to set up your own private savings with a hedge against both your own currency and high indebtedness, which means that the Riksbank will hardly raise interest rates in the near future.
 
@Anna Svahn

 

 

 

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12/12/2019 17:07:11

 

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