The New Normal, a catchall term for lower returns, lower GDP growth and lower employment moving forward and popularized by PIMCO’s (at the time) Mohamed El-Erian, might be defeated, but it’s far from dead.
How workers will react to its next resurgence, specifically in retirement saving, is the subject of a new paper from three highly-regarded academics—Vanya Horneff, Raimond Maurer and Wharton’s Olivia Mitchell.
“Many believe that global capital markets will generate lower returns in the future versus the past,” the authors note. “We examine how persistently lower real returns will reshape work, retirement, saving and investment behavior of older persons using a calibrated dynamic life cycle model.”
The findings?
In a low return environment, workers build up less wealth in their tax-qualified 401k accounts than in the past, claim social security benefits later and work more, according to the report.
“Moreover, the better-educated are more sensitive to real interest rate changes, and the least-educated alter their behavior less. Interestingly, wealth inequality is lower in periods of persistent low expected returns.”
Results are similar for men and women, they add, “yet the best-educated subgroup optimally changes behavior more, compared to the least-educated. Overall, the changes reduce observed wealth inequality. Sensitivity analyses allowing for age-based investment profiles akin to target date funds shows that results are robust.”
For those that think it only applies to certain economic policies, the researchers compared their results to low-growth, high-stimulus “Japanese”-style Abenomic economy “with low expected returns and low equity premia, and again findings are comparable.”
“We leave for future work a discussion of the potential macroeconomic consequences of reduced saving and earlier claiming patterns,” the authors conclude. “Nevertheless, our life cycle model which embodies richly detailed tax and social security claiming rules is clearly an invaluable tool to help assess how households will react to the ‘new normal’ financial market conditions.”