A Brussels-based group standing up for European users of financial services has warned that European savers and investors in long-term savings and pension products face a particularly sharp erosion of purchasing power as a result of rising prices.
Speaking about “financial repression”, Betterfinance, one of two EU-level consumer finance NGOs that regularly interact with the European Commission, said European savers are set to lose “hundreds of billions of euro” in purchasing power in 2022 alone.
The group said that French savers and retail investors alone stand to lose “well over 100 billion euros” in real, inflation-adjusted terms this year. For 2021, these losses in real terms were calculated at 43 billion euro for French savers and at 22 billion euro for their counterparts in Belgium, Betterfinance said, adding that inflation rates in 2022 are projected well above the levels for last year.
Real value of savings ‘almost halved’ since 1992
Based on three decades with inflation running at an average of about 2 percent, the real value of all long-term and pension savings has “almost halved since 1992,” said Betterfinance. The group is now calling on government authorities such as the European Commission to introduce better disclosure rules that would force providers of such financial products to inform their retail clients of real, inflation-adjusted returns.
“With inflation soaring dramatically since 2021, it is high time that public authorities at least require disclosure of real returns on long-term savings alongside ‘nomina’ (and therefore largely fictitious) ones, and lead by example in their own public reports,” said Guillaume Prache, managing director of Betterfinance.
‘Taxing losses needs to stop’
Betterfinance also asked national governments in Europe to better consider the impact of inflation in their tax policies for savings and investment products. “Member States should also stop de facto taxing the loss of purchasing power of their long-term savers,” Prache said.
Disclosure requirements in the European Union do not require financial services companies to disclose the returns of long-term savings products in real terms, adjusted for inflation. “Regulatory requirements do not take inflation into account and thus exacerbate the damage suffered by pension savers,” Betterfinance said.
“This is particularly detrimental to savers since behavioural finance has clearly shown that savers suffer from cognitive biases such as ‘money illusion’ and ‘exponential growth bias’,” it said. “Due to the money illusion, people tend to view their wealth and income in nominal terms, rather than recognising their actual purchasing power - their real value adjusted for inflation.”
Exponential growth bias is the tendency of people to underestimate the effects of compound interest, said Betterfinance. “For savings and investments, this means that people tend to overestimate their purchasing power,” it said.