Lawmakers approved pension reform bills for civil servants, public-school teachers and political appointees last week, with the controversial 18 percent interest rate applicable to portions of the pensions of retired civil servants and public-school teachers to be conditionally phased out over the next few years.
This naturally begs the question: Why do retired employees of state-owned or state-controlled banks still receive 13 percent interest? Should the government also take action on this issue?
The 13 percent savings rate has long raised concern over the financial burden placed on such banks, but what has particularly raised eyebrows is that there is an increase in perceived economic inequality and relative deprivation.
Minister of Finance Sheu Yu-jer (許虞哲) on Friday said the government would soon address the 13 percent preferential rate by gradually decreasing it to less than 6 percent over a six-year period for retirees of the Bank of Taiwan, the Land Bank of Taiwan, the Export-Import Bank of the Republic of China and the central bank.
Apart from these four state-owned institutions, several banks in which the government holds majority control also provide their retirees with the subsidized rate.
The preferential savings rate underwent two reforms under former president Chen Shui-bian’s (陳水扁) administration, with employees hired after 2008 no longer entitled to such a rate.
This policy was implemented to address difficult circumstances at the time, but there is little justification for such a policy to continue.
It is expected that retirees and unions at state banks will present their demands soon and might launch protests if the government tries to change the preferential rate, similar to protests seen during the reform process for civil servants’ and teachers’ pensions over the past several months.
They are not the only retirees who want to retain these sorts of privileges — everyone who depends on interest payments wants to be treated the same way.
Everyone knows reform is painful, but necessary. The questions are how to proceed and who is willing to tackle it.
However, the inevitable question is: Why are the interest rates on regular savings accounts so low?
One explanation is due to low inflation expectations, which is attributable in part to the success of the central bank’s commitment to low and stable inflation.
However, as real interest rates — allowing for the change in the level of prices — have also fallen, it seems to reflect a slim chance for long-term economic growth, given the effects of such factors as aging and declining productivity.
The central bank has clearly tried to maintain a policy that supports economic growth. This poses the question of whether the low-rate situation is a new normal and if interest rates are to be determined by market fundamentals, or just by the government’s policies.
While the advantages of lower rates are encouraging businesses to borrow and consumers to buy, which to some extent supports economic recovery, the disadvantages have nowhere to hide.
Insurance companies are likely suffering less profitable investments and most savings account holders are earning lower interest, which in turn restricts their spending and overall economic activity.
Banks hold excessive savings, but have weak business investments, which leads to weaker productivity growth. Is a low interest-rate policy to boost the economy still justifiable?
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