Interactive Investor

Bank of England official says retirement age may need to rise to fight recessions

27th July 2021 12:57

Alex Sebastian from interactive investor

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MPC member Gertjan Vlieghe said reducing the time people spent in retirement would help the central bank tackle future recessions.

A top Bank of England England official has raised the possibility of increasing the retirement age to tackle future recessions faced by the UK.

In his last speech as a monetary policy committee (MPC) member Gertjan Vlieghe said that reducing the time people spent in retirement may be necessary to preserve the central bank’s ability to stimulate the economy.

In a speech given at the London School of Economics titled “Running out of room: revisiting the 3D perspective on low interest rates”, Vlieghe explained that as they near retirement people spend less money and this reduces the impact of monetary policy moves such as rate cuts.

As a bigger proportion of people hit retirement relative to the total population, the central bank will find it harder to stimulate the economy enough to reverse a downturn, Vlieghe explained.

This is a dangerous scenario, as it could mean recessions become entrenched and turn into long-lasting depressions.

There are two underlying demographic trends that cause this; fewer children being born per person and people living longer.

Given this, even to stay level at the same proportion of people in retirement over time, the retirement age would need to rise.

“I argue that we are only about two-thirds of the way through a multi-decade demographic transition that is affecting interest rates,” Vlieghe said.

“Absent policy changes, there is no prospective reversal in this particular driver of interest rates: downward pressure from demographics either continues further or remains where it is.”

“The key mechanism is not that older people have lower savings rates, but rather that, as people age, they hold higher levels of assets, in particular safe assets, and those assets are only run down slowly and partially late in life. The higher saving of the middle-aged outweighs the modest dissaving of the retirees.”

“The policy implications are even more stark than when I first discussed them nearly six years ago,” Vlieghe continued.

“We have limited headroom for easing monetary policy, so we will not be able to provide monetary stimulus on the same scale as in previous recessions. QE headroom, which should be measured in basis points of yields rather than in billions of bonds available for purchase, is limited as well.”

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