Should self-funded retirees be concerned that interest rates on term deposits have declined?

Some readers will wonder why I am bothering to ask this question. It appears to be fairly obvious that people who are relying on interest on term deposits to fund their retirement must have greater difficult in surviving without drawing upon their capital when interest rates are as low as they are now.

However, it is by no means clear that the relevant interest rate is lower now than it has been over most of the last 15 years or so.

So, what is the relevant interest rate? First, nominal interest rates should be adjusted for taxation since the interest income that people are able to spend is the amount left after tax has been paid.

Second, it is also necessary to take inflation into account in the calculation. Inflation tends to deplete the purchasing power of the amount deposited, so some part of the after-tax interest has to be saved in order to prevent the real value of the nest egg from being depleted. Retirees who do not take inflation into account in their calculations are suffering from money illusion - an affliction that enables them to spend their children’s inheritances without feeling any guilt until they realize how much the real value of those sums have depleted.

So, if a retiree is intent on preserving the real value of her capital, the amount of interest income available to be spent is real after-tax interest. You might well ask why a retiree would want to preserve the real value of her capital. That is a very good question. If she has saved the funds to spend during retirement, it does not make any sense for her to be obsessed with the idea of living on interest and preserving capital. The important point is that awareness of the real after-tax interest rate might help her to avoid depleting the real value of her savings more rapidly than she intended.

The chart below shows trends in Australian interest rates on one year bank term deposits, after-tax interest rates on those deposits assuming a marginal tax rate of 30%, and real after-tax interest rates (deducting the CPI inflation rate for the previous 12 months). The data used in the chart is sourced from the Reserve Bank of Australia.

From the chart it looks to me as though it is about 15 years since retirees have been able to spend any of their interest income from term deposits without depleting the real value of their savings. 

It is easy enough to understand that some elderly people might suffer from money illusion and consider it to be sinful to deviate from time-honoured prudential rules about living off nominal interest. One would hope that professionals in the investment advice industry would encourage such people to modify their views somewhat to take account of tax and inflation.

However, some senior people in the investment advice industry have been encouraging the view that low interest rates have reduced the real spending power of retirees. For example, Jeremy Cooper, chairman of retirement income at Challenger Ltd, and the man who chaired the 2010 review of the superannuation system, has been reported in The Australian as saying:

 “Back when bank deposit rates were around 6 and 7 per cent there was no great problem with self-funded retirees relying on bank interest”.

In the same article, Jeff Rogers, chief investment officer of IPAC funds at AMP Capital, made a similar point. He is reported as saying bank deposit rates “will now adjust to just below 3 per cent, so with core inflation at around 2.4 per cent your real spending power is very small” in a self-funded retirement and warns that even if interest rates do start moving up again, “they won’t be going back up any time soon to the level that provided bank interest of 6 to 7 per cent’’. (Article by Andrew Main, ‘Risk rules for retirees reliant on bank interest’, May 6, 2015.)

It looks to me as though the after-tax real rate was close to zero when bank deposit rates were around 6 or 7 per cent, just as it is now.

Why are old Americans more satisfied with their lives than are old Europeans?

The latest WorldHappiness Report (2015) contains an interesting chapter examining how happiness varies around the world by gender and age. The chapter was written by Nicole Fortin, John Helliwell and Shun Wang.

What would you expect those comparisons to show? I guess many people would expect that, on average, women would be less happy than men because in most of the world the opportunities available to females are still less favourable than those available to males.

The data doesn’t actually show that. When people are asked to rate their lives relative to the best possible and worst possible life (i.e. using the so called Cantril ladder) the world averages show that until they are about 50, women tend to rate their lives more highly than men. Perhaps women are more inclined to look on the bright side of life.

In any event, differences between the happiness of women and men are much less marked than differences between young and old people. On average, happiness tends to decline to about age 40 - a few years later for men than women - and then to stay relatively flat.

That finding was a surprise to me. I was given the impression from research I had read about that happiness was U-shaped over the life cycle. When I looked for more recent literature, just now, I found an article by Paul Frijters and TonyBeatton, published in 2012, based on panel data for Germany, Britain and Australia, which suggests the dominant age-effect is a strong happiness increase around the age of 60, followed by a major decline after 75. So I should have had an open mind about what to expect.

The data in the World Happiness Report shows a great deal of variation in the relationship between age and happiness in different parts of the world. Happiness does not vary much with age in South-East Asia, South Asia and Sub-Saharan Africa. Happiness declines sharply with age in CEE&CIS region (former Soviet Union, Eastern Europe and Central Europe) and less sharply with age in Latin America, Middle East and North Africa and Western Europe. The only regions with the U-shape are East Asia and NA&ANZ (North America, Australia and New Zealand).

It does not surprise me that there is a different relationship between happiness and age in high and low income countries, but I did not expect to see the different patterns in Western Europe and NA&ANZ which are shown below (based on Figure 3.2 of the World Happiness Report 2015).The NA&ANZ data are dominated by America (regional averages are calculated using population weights) so I am seeking an explanation of why old Americans are relatively more satisfied with their lives than old Europeans.

The different pattern between America and Europe also showed up in survey respondents’ reports of some positive emotions experienced the preceding day: smiling and laughing a lot; enjoyment; and learning or doing something interesting. The survey data also shows that older women in Western Europe report experiencing greater sadness, physical pain and depression than do men of comparable age in that part of the world, or people of either gender in America.

A hint about the possible causes of the difference in patterns between America and Europe is given by looking at the determinants of life satisfaction, as indicated in the regression analyses undertaken for the report. Those determinants are income, health, generosity, corruption, freedom of choice and social report.

An inspection of the graphs showing how those variables differ according to the age of respondent suggests that the main area of difference is in respect of perceptions of social support. What this means is that, on average, older people in Western Europe perceive that they are less able to count on relatives and friends for support when they need it than are older people in North America.

It is interesting to speculate about the reasons why old people in Western Europe are less likely to feel that they can count on relatives and friends in times of need. The thought that passes my mind is that the reasons might have something to do with the nature of the welfare states of Western Europe, but that might just reflect my prejudices. 

Should scientists be seeking to persuade or inform?

When I hear scientists engaged in policy advocacy I often cheer them on. At other times I make cynical comments questioning whether their conjectures have any substance. I notice that other people seem to have similar reactions, but some jeer when I cheer and vice versa.

In thinking about my own reactions I am able to rule out some possible reasons for negativity without much difficulty.

Expertise: My reactions are not always closely related to my own expertise. I can react positively or negatively to scientific advocacy in relation to areas of public policy in which I have no expertise as well as in aspects of economic policy where I can claim some expertise.

Conservatism: My reactions do not seem to be consistently conservative in the sense of being cautious about change. Sometimes I feel that scientists are setting out to make me worry unduly about the implications of our current lifestyles, but I am less inclined to feel that they are trying to make me feel more complacent than I should be about potential adverse effects of various innovations e.g. GM food or health effects of living close to power lines or wind farms.

Research funding: My reactions are not necessarily related to the question of how the scientists fund their research. In some instances I might suspect that they are advocating in the interests of the people who have provided funding, or slanting their presentations to further their interests in obtaining more funding, but such factors are not always relevant.

Indoctrination: My reactions are unlikely to be the result of indoctrination by particular branches of the news media. I am exposed to a range of media organisations with a range of different biases.

I had to think more carefully about whether my reactions could be related to the presentation skills of the scientists. I know I have a strong allergic reaction to being preached at or manipulated. So, I took a look at Jason Nazar’s 21 principles of persuasion and some other web sites discussing the art of persuasion. In the end I realized that I don’t have too much difficulty these days in being able to appreciate the persuasive skills of speakers while disagreeing with the messages they are presenting. I can also support the message being presented by speakers while thinking they could do with some help to improve their presentation skills.  Membership of Toastmasters encourages people to think about such matters.

It was not until I stumbled on an article by Dan Kahan on the science of science communication that I realized that the reactions that people have to advocacy by scientists might be related to Bryan Caplan’s concept of rational irrationality and Jonathan Haidt’s moral foundations theory (which have previously been discussed on this blog). Caplan suggests that people can have an almost religious attachment to irrational beliefs about economics, while Haidt suggests that identification with groups tends to blind people to the wisdom of people outside those groups.

Cutting to the chase, Kahan tests the performance of two hypotheses to explain why there is so much public dispute over science-based conjectures about the risks that humans are facing. The first thesis, the public irrationality thesis (PIT), predicts that the gap between public and expert assessments of risk narrows as members of the public become more literate about science. On that basis, people who scored highest on science comprehension could be expected to be more concerned about climate change than those with lower scores. However, this doesn’t happen - at least it doesn’t happen in studies cited by the author.

The second thesis, the cultural cognition thesis (CCT) posits that certain types of group affinities are integral to the mental processes ordinary members of the public use to assess risk. Kahan cites various studies that have tested CCT, but the results of one which tests CCT head to head against PIT are particularly interesting. The results show that on issues that have become politicized – such as global warming and fracking – the average divergence between risk assessments of people who identify as liberal democrats and conservative republicans is greater among those who have high levels science comprehension than among those who have low levels of science comprehension. (See chart below.) The results suggest that individuals who are most adept at scientific reasoning search out evidence to support their cultural dispositions.

 

Source: Dan Kahan, 'What is the science of science communication', Journal of Science Communication, 2015 

The study suggests that there is little difference between risk assessment of liberals and conservatives on issues that have not become politicized e.g. artificial food colourings, exposure to radio waves from cell phones, GM food, exposure to magnetic field of high voltage power lines, use of artificial sweeteners and nanotechnology. The PIT thesis does apply to such issues. I guess the results might differ in countries where some of these issues, e.g. the risks associated with GM food, have become politicized.

So, in the light of the above, how should I react to the Earth Statement recently published by a group of eminent scientists which suggests that “2015 is a critical year for humanity” and predicts dire consequences if international forums to be held this year decide to postpone substantial reductions in greenhouse gas emissions? Let me quote a paragraph:

“We can still avert dangerous climate change. However, we are currently on a warming trajectory that will leave our world irrevocably changed, far exceeding the 2°C mark. This gamble could propel us into completely uncharted waters, with unmanageable sea-­level rise and a vastly different climate, including devastating heat waves, persistent droughts and unprecedented floods. The foundations of our societies, including food security, infrastructure, ecosystem integrity and human health, would be in jeopardy, impacting most immediately the poor and vulnerable.”

My immediate reaction was along the lines that they would say that wouldn’t they. Those who preach about the end of the world can always be expected to tell us to repent now for the end of the world is nigh. Would you expect them to say that it is now too late to do avoid catastrophe, or that there is no need to worry much for the next 20 years or so?

I claim no expertise in climate modelling, but the little I know suggests to me that current models are not reliable enough to tell us that it is critical that further action be initiated in 2015. Such claims seem to me to be more like hysteria than science.

That leaves those of us who accept the physics of the greenhouse effect with great difficulty in assessing the urgency of the threat to humanity that it may involve.  It is easy enough to find 22 ways to think about the climate debate, but it isn’t easy to find a dispassionate expert overview of the relevant science. Nearly all leading scientists seem to have become preachers.

When scientists seek to persuade people to adopt particular positions on contentious policy issues it is inevitable that they will be seen to be preaching rather than presenting information on the current state of knowledge. If scientists want to be listened to by people other than their political cheer squads of “true believers” they should distance themselves from policy debate and display some modesty about the quality of their conjectures. 

Did Christianity invent the individual?

Inventing the Individual by Larry Siedentop, makes an important contribution to available literature on the origins of the individualism and secularism which characterize Western Civilization.

Before I read the book I was aware from reviews that the author claims that, in some sense, Christianity “invented” the individual. How could that be so?

Siedentop summarizes his argument: “in its basic assumptions, liberal thought is the offspring of Christianity” (p 332). What he means by “inventing the individual” is recognition that individuals have natural rights, including the rights to liberty, to equality before the law and to election of representatives. As early as the 13^th and 14^th centuries, recognition of the important roles of conscience and individual choice even led some philosophers associated with the church to recognize that enforcing moral conduct is a contradiction in terms. The essence of Siedentop’s argument, is that liberal thought became established as a way of thinking “as the moral intuitions generated by Christianity were turned against an authoritarian model of the church” (p 332).

The words, “moral intuitions generated by Christianity”, raise another problem that I might as well consider before moving on to provide some positive comments. The moral intuitions that Siedentop is referring to are intuitions about moral equality and reciprocity – including the ideal of loving others as oneself and the golden rule of doing unto others are you would have them do unto you. My problem is that something like the golden rule is common to the major religions and is expressed in remarkably similar terms in Judaism, Buddhism, Taoism, Confucianism, Hinduism and Brahmanism. More fundamentally, the idea of moral intuitions being generated by religion seems to rule out of consideration the possibility that such intuitions are innate. Perhaps Siedentop means to argue that Christianity has been more successful than other religions in cultivating moral intuitions, but his book contains few references to other religions.

One reviewer, Samuel Moyne, writing in Boston Review, has suggested that there is a major difficulty for anyone who tells a Christian story of liberalism’s origins:

“They must explain how, against its original purposes, the Gospel’s message was brought down to earth, applied right now to radically new aims and institutions that Jesus and Paul would not have accepted. The reversal is stark: from a refusal of the relevance of Christian moral beliefs’ to politics to a revolution in this-worldly assumptions about the subordination of individuals to hierarchy. You need an argument to show how this happened. Siedentop doesn’t really have one. He just knows the reversal occurred”.

Siedentop has probably attracted such criticism because he has been over-ambitious in stating the aim of his book. He has set out to answer a very big question:

“Is it a mere coincidence that liberal secularism developed in the Christian West?”

In my view his book should be viewed as answering a more modest question:

Did Christianity contribute to the advent of liberal secularism in Europe? That is a fairly provocative question in view of the common belief that liberal secularism stems solely from the Renaissance in Italy and the rediscovery of ancient humanism.

This book shows that liberal secularism has some strong moral roots in Christianity. The author also acknowledges that the development of market towns and cities played an important role in the growth of freedom (as have other authors including Adam Smith in Wealth of Nations). 

I found the author’s discussion of St Paul’s contribution to be a powerful reminder that his message was about, among other things, the idea that all humans are children of God and the potential of that idea to liberate individuals from constraining perceptions of their personal identities as defined by social roles - such as father, daughter, official, priest or slave. Siedentop puts it his way:

“Paul overturns the assumption of natural inequality by creating an inner link between the divine will and human agency. He conceives that the two can, at least potentially, be fused within each person, thereby justifying the assumption of the moral equality of humans.  … That fusion marks the birth of a ‘truly’ individual will through the creation of conscience” (p 61).

The book is largely about the development of the concept of ‘moral equality’ within the Christian establishment as well as among heretics. Siedentop points out that the concept of moral equality was evident in the early years of Christianity, and led to recognition of the claims of conscience by some influential Christians. For example, he quotes Tertullian as recognizing that “it is a basic human right that everyone should be free to worship according to his own convictions” (p 78).

It was, of course, many centuries before the implications of moral equality came to be tolerated by Christian churches - the full implications have arguably yet to be accepted by most church leaders. The author takes us through the history, providing a fairly persuasive case that the roots of Western liberalism were firmly established in the arguments of canon lawyers and philosophers by the 14^th and early 15^th centuries.

One of the most interesting parts of the book is the discussion of the views of John Duns Scotus and William of Ockham. At the end of the 13^th century Duns Scotus identified freedom as a necessary condition of moral conduct and argued that “an act is neither praiseworthy nor blameworthy unless it proceeds from the free will” (p 294). In the 14^th century Ockham probed the concept of dominium (or lordship) which had hitherto rested on the assumption of natural inequality and involved both a right to govern and a right to own. Thus, the role of the paterfamilias in the ancient family meant that the father not only governed but in a sense owned his family. Ockham insisted that the existence of a right implied moral authority – rightful power – rather than just exercise of de facto power. Discussion of rights brings to bear the concept of moral equality, and with that, recognition of freedom of the will and individual moral agency.

William of Ockham

My mind is unable to comprehend the book’s discussion of the contest between doctrines associated with Aquinas and Ockham on the question of whether references to eternal ideas in the mind of God implies a restriction on God’s freedom. In terms of the book's objectives, however, the important point concerns the role of the individual’s will. Siedentop notes that Ockham associated reason with individual experience and choice, and saw ‘right reason’ as obligated by principles of equality and reciprocity (p 309). 

Incidentally, the discussion of the different approaches of Aquinas and Ockham left me with the impression that the author is claiming that Ockham rejected Aristotle’s teleological reasoning.  However, the entry on Ockham in the Stanford Encyclopedia of Philosophy suggests otherwise. According to that source, Ockham accepted Aristotle’s view that humans have a natural orientation toward pursuit of their own ultimate good (happiness).  The point that Ockham adds is that this inbuilt orientation does not restrict individual choice - individuals are free to choose whether or not to will their ultimate good.

It seems to me that the author has provided people in the West with a timely reminder of the links between liberal secularism and the concepts of moral equality and freedom of conscience. The book reminds us that secularism is not devoid of values. As Larry Siedentop puts it, “secularism identifies the conditions in which authentic beliefs should be formed and defended”.