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QE hasn't hurt pensioners? A £25bn income hit says otherwise
New research runs counter to the Bank of England's claims that its controversial policy of stimulating the economy has had no impact on pensioners.
by Michelle McGagh on Sep 07, 2012 at 11:09
The Bank of England recently dismissed the idea that its policy of creating £375 billion of new money to avoid a slump has hurt pensioners. However, a report from Saga, the over-50s service company, says it has contributed to a fall in pensioners' spending power that has cost the economy £25 billion.
The research says a ‘toxic combination’ of low interest rates, overshooting inflation and quantitative easing (QE) – the process in which the Bank creates money and uses it to buy UK government debt, or gilts – has cut the spending power of 21 million older people.
The Saga report, compiled by the Centre for Economics and Business Research, is a response to the Bank’s comments last month that pensioners had not been hurt by QE. Although the QE programme has driven down gilt prices, which in turn pushes down annuity rates, or the amount of income that a pension will buy in retirement, the Bank said its programme led other assets to rise, cancelling out the negative effect.
The Bank claimed QE boosted the wealth of UK households by around £600 billion, leading to increased spending.
9% income drop
However, Saga’s research suggests Britain’s over-50s have suffered a 9% drop in real income between the first three months of 2008 and the second quarter of 2012, leading them to reduce their spending. This drop in spending is the equivalent of taking £24.7 billion out of the economy, or a 1.6% drop in GDP.
Quarterly Saga surveys show the over-50s have cut back on goods and services as they struggle with the rising cost of living. Half of older households have had to curb spending on clothes, shopping and entertainment. Three-quarters have cut back on hospitality and food.
Ros Altmann, director general of Saga, said the Bank had ‘scored an unexpected own-goal’ when it came to the over-50s. ‘This age group represents more than half of UK households and contributes nearly half of all domestic consumption, but the toxic combination of rock-bottom interest rates, spiralling inflation and QE money-printing has put a big squeeze on their incomes, forcing many to make cutbacks,’ she said.
‘This change in spending habits has not just hit their living standards, it has also sucked almost £25 billion out of the economy, reduced the Treasury’s tax take, and may have inadvertently tipped us into recession.’
Want to know more about QE? Watch this video:
'2 freaky facts about QE or quantitative easing'
Call for change
Saga is calling for a change to policy to help reverse the situation older people find themselves in today.
Temporary tax breaks for capital spending to encourage businesses to execute investment plans.
The introduction of incentives for house building so suitable housing for older generations is available.
Pension fund assets to be used to invest in infrastructure and lend to small businesses, with government underpinning to mitigate risks.
The Bank of England to stop buying gilts at the expense of the pension system.
‘We need the authorities to look at more effective ways of reinvigorating the economy. If they want to generate growth and employment, they should be considering a plan without the damaging side-effects of QE,’ Altmann said.
The public's satisfaction with the Bank of England has fallen to its lowest level on record, according to a quarterly survey from the central bank released today. The survey showed 29% of Britons are dissatisfied with the Bank, the worst figure since the survey started in 1999.
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