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Lucky enough to have a pension? Low interest rates mean it may no longer guarantee a secure retirement.

The Federal Reserve has done a lot to help keep our economy afloat. It has cut interest rates to unprecedented low levels, bought trillions of dollars of corporate IOUs, helped stabilize the debt markets and helped rescue a stock market that had begun falling sharply in mid-February when the covid-19 recession started and had seemed headed for a crash.

But if you dig deeper, you'll see that the Fed is unintentionally worsening economic inequality - by providing the most help to Americans who are least in need of it and putting stress on the most important asset for the middle class: retirement benefits.

Higher stock prices are great for people who own a lot of stocks, but stock ownership is heavily concentrated. The top 1 percent in terms of wealth own 52 percent of stocks, according to Fed statistics, and the top 10 percent own 88 percent.

Despite its good intentions, the Fed is setting the stage for huge problems down the road for pension funds and potential pension recipients. There are also going to be problems for insurance companies and other firms onto which many corporate employers have offloaded their pension obligations in order to clean up their balance sheets and minimize their future financial risks.

The firms that have assumed the responsibility for paying these pensions typically own bond-heavy portfolios. And with bond rates expected to rise in the future, that will decrease the market value of the bonds held by the firms that have assumed responsibility for paying pensions.

The Fed is trying to salvage the present by pumping trillions of dollars into the U.S. and world financial systems, but in the process it is putting our economic future at risk. "We're bailing out the present and making the future pay for it," said Gene Steuerle, a co-founder of the Tax Policy Center.

Please note that I'm not blaming the Fed. It's trying to fulfill its mandate to keep employment high, inflation relatively low, the dollar reasonably stable and interest rates at what it considers an appropriate level. The Fed's job, already difficult in strange and uncertain economic times like these, is being made much harder by the lack of new economic stimulus packages from Congress and the White House. These packages not only help individuals but also stimulate the economy when recipients spend the money they've gotten.

The Fed, by contrast, can help the financial markets and the economy but can't directly help individual people.

Now, let me show you how the Fed's ultralow rates over the past dozen years, which Fed Chair Jay Powell says will continue indefinitely, are undermining the long-range future of the U.S. retirement system. This matters - a lot - because retirement benefits (not including Social Security) are hugely important to the middle class.

Edward Wolff, an economist at New York University who studies income and wealth inequality, told me that Fed statistics show that pension wealth accounts for 70.3 percent of the net worth of the middle class, which he defines as people ranking in the 20th through 80th percentiles in terms of wealth. By contrast, he said, retirement benefits account for only 2.2 percent of upper class's wealth.

This makes the middle class particularly vulnerable to rising rates in the future.

For starters, near-zero rates are worsening the financial problems of the already stressed Social Security system by sharply reducing the interest that Social Security can earn on its $2.9 trillion trust fund. That trust fund consists entirely of Treasury securities and is legally barred from owning stocks. That means the fund is not benefiting from the 50 percent rise in stock prices since the market bottomed out on March 23.

The near-zero rates also affect private pensions. David Zion of Zion Research estimates that the pension funds of the S & P 500 companies, which he says were already underfunded by a total of $279 billion at the end of 2019, were underfunded by $407 billion as of June 30. "The main driver of the increase is lower interest rates," he said.

And that shortfall is only a fraction of the underfunding afflicting state and local government pension funds. Keith Brainard, director of research for the National Association of State Retirement Administrators, estimates that the 5,332 retirement funds sponsored by state and local governments were $1.96 trillion underwater as of June 30, according to the most recent available data, up from $1.90 trillion as of year-end 2019. This has happened, he said, even though the funds' assets reached an all-time high of about $4.65 trillion.

What's more, if you use dispassionate math rather than the generous accounting principles that public pension funds are allowed to use, you see that lower long-term interest rates are doing much more damage than the numbers from Brainard's organization suggest. For instance, Steve Church of Piscataqua Research estimates that the combined shortfall of the 127 public pension funds that he follows, which have a total of about $4 trillion of assets, has reached about $7.44 trillion. That's more than quadruple the funds' reported $1.53 trillion shortfall.

This huge difference stems mostly from different assumptions about interest rates and different ways of calculating how much money a fund needs to have on hand today to meet a future obligation. A public pension fund comes up with how much it needs to set aside based on the income it expects to earn on its portfolio. Corporate pension funds engage in the same process but are required to make far less optimistic assumptions. They have to set aside enough money to meet that obligation if the money were invested at the interest rate on high-quality, long-term risk-free bonds.

Let me give you one example of the difference. If a pension fund expects to pay someone $10,000 in 10 years and anticipates it will earn 7 percent a year, compounded, today's cost of that benefit - what number-crunchers call its "present value" - shows up on its books as a liability of $5,083. If, however, the fund anticipates receiving 3 percent per year, which is about the rate that corporate pension funds use these days, the fund would need to set aside $7,441.

All of this is leading private and public pension funds to take on more risk. "When yields are low, you go looking for income somewhere else," Zion told me.

That means putting money into stocks and various aggressive (and high-cost) Wall Street schemes such as private equity and venture capital funds.

In addition, some public pension funds are borrowing money to try to earn what financial types call "spread income," by investing the borrowed money in assets whose returns exceed the funds' borrowing costs. "When the risk-free rate is zero and you need seven, that's what prompts plans to move outside their traditional comfort zones," said Steve Foresti, chief investment officer of Wilshire Consulting.

Foresti, who advises numerous public pension funds, says that the use of borrowed money, alternative investments and such began getting more popular about a decade ago. That's about when the Fed knocked rates to near zero.

One prominent example of a fund trying to borrow its way out of trouble is the California Public Employees' Retirement System (CalPERS), the nation's largest government pension fund. It's considering borrowing up to $55 billion more than it has already borrowed, hoping that its return on the assets it will buy with that borrowed money exceeds what it will pay in interest.

The fund, which says it currently has about $25 billion of borrowed money, for which it's paying an average interest rate of 0.18 percent, now has authority to borrow up to 20 percent of its assets. That's roughly $80 billion.

CalPERS says borrowing has helped it because it's been earning more on the assets it bought with the borrowed money than the interest it's paying.

"It's a moderate use of leverage. We will do it opportunistically and gradually," Marcie Frost, CalPERS's chief executive, told me. "We can tie up our capital for a long time ... We are able to be opportunistic." However, Frost readily acknowledged, "leverage can exacerbate your losses."

Or let's look at another big fund, the Teacher Retirement System of Texas, which last year lowered the assumed rate of return on its total investment portfolio to 7.25 percent from the previous 8 percent. Among other things, that lower assumption is indirectly responsible for teachers, school districts and the state of Texas having to increase their future contributions to the fund to avoid a reduction in future benefits.

Jase Auby, TRS's chief investment officer, says the fund has been borrowing 4 percent of its assets for about a year. The idea, he said, is "to diversify away from equity risk" - the danger that stock prices will fall - caused by low interest rates. "Equity risk is greater because interest rates are low," he said.

The fund says its borrowing cost is currently about 0.25 percent a year. TRS says that no specific assets were financed by its borrowings but that it's ahead so far because its total fund return has exceeded borrowing costs. If, however, the value of the assets bought with the borrowed money goes down, the fund obviously will be worse off than if it hadn't borrowed the money.

By forcing bond yields down sharply and helping drive up stock prices, the Fed's low-interest-rate regime has made 401(k), 403(b) and other individual retirement accounts more valuable - for now - by boosting the market values of both stocks and bonds.

However, these low rates are now exposing those individual accounts to considerably more risk than if stock prices were lower and bond yields higher.

Why do I say this? Because high stock prices can fall - we've had two 50 percent market drops in the past 20 years - and low-yielding Treasury securities will lose value if interest rates move higher.

I'd love to be able to quote Fed people to give you the Fed's side of all of this. Alas, none of the people I've talked with or approached, some of whom I've known for years, are willing to be quoted by name.

Privately, various Fedniks past and present agree that there are serious downsides to what the Fed has been doing since then-Chair Ben Bernanke (who declined, through a spokeswoman, to talk with me) first cut rates to near zero in 2008 and successfully ended the stock market meltdown and financial panic.

These Fedniks are also familiar with the risks that ultralow rates pose to the retirement system and the impact these rates have on economic inequality by sharply raising the values of financial assets, which are owned disproportionately by high-net-worth people, while doing relatively little for the less well off.

But they won't talk about it publicly. Still, the issue needs to be recognized. If we don't do something to offset the damage to our retirement system, today's problems could end up looking like a rounding error compared with what the future holds.

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A version of this article was copublished with ProPublica.

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