The Federal Reserve, which these days seems to be the only major part of the federal government capable of operating drama-free, has done a lot to help keep our economy afloat. It has cut interest rates to unprecedented low levels, bought billions 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 that seemed headed for a crash.

In the process, the Fed has indirectly provided support to house prices and to the vital home construction business by forcing down mortgage interest rates to all-time lows of about 3%. Given that home equity is a major asset for many middle-class Americans, supporting home prices is especially important. As is supporting the home construction industry, which is a major source of blue-collar jobs.

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 it’s also putting stress on the middle class’ most important asset: retirement benefits.

Higher stock prices are great for people (including me) who own a lot of stocks, but those people are primarily the top 10% of the country, in terms of wealth. According to Fed statistics, more than half of stocks — 52% — are owned by the wealthiest 1% of Americans, and 88% are owned by the top 10%.

To show you a different aspect of helping the upper class but not the working class, the Fed’s securities purchases include buying debt issued by firms that are laying off workers while paying substantial dividends to shareholders. And for some imprudent or troubled corporate borrowers, the Fed’s moves have been hugely helpful.

But those moves are hurting prudent savers of modest means by greatly reducing the income they can earn on Treasury securities and other no-risk investments such as bank certificates of deposit. That tends to drive people seeking income into the stock market, where their capital is at risk. By contrast, if you buy a Treasury security, you’re sure of getting your money back when the security comes due, even though the security’s market value will fluctuate both up and down while you hold it.

Interest rates are so low that they’ve largely erased the key benefit — income — Treasury bonds are theoretically supposed to provide over stocks. If you own a low-cost Standard & Poor’s 500 index fund, you’re getting much more income from dividends than the interest you’d earn having the same amount invested in a 10-year Treasury note. For example, the dividend yield (a year’s worth of dividends divided by the current market price) on Admiral shares of Vanguard’s S&P 500 fund is more than double the interest yield of a 10-year Treasury. It’s even higher than the yield on a 30-year Treasury bond, something that you rarely see.

The yield on the Vanguard fund was 1.65% as of Sept. 30, the most recent available date. As I write this, the yield on a 10-year Treasury, the security it generally makes the most sense for a retail investor to buy and hold to maturity, was 0.76%. The yield on the 30-year Treasury was 1.56%.

Despite its good intentions, the Fed is setting the stage for huge problems down the road for pension funds and, therefore, for potential pension recipients. There are also going to be problems for insurance companies and for 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 while bond prices have risen because interest rates have fallen — I’ll explain how that works some other day — rates seem much more likely to rise from their current low levels in the future than to fall even lower. And when rates rise, it will decrease the market value of the bonds held by the firms that have assumed responsibility for paying pensions.

What it all adds up to: 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 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 for what it’s doing. 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, which is 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, as we saw when they were in effect earlier this year, 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 near-zero rates, the culmination of a dozen years of ultralow rates and which Fed Chair Jerome Powell says will continue indefinitely, are undermining the long-range future of the U.S. retirement system. This matters — a lot — because Fed statistics show that retirement benefits (not including Social Security) are hugely important to the middle class.

Prof. Edward Wolff of New York University, who specializes in studying income and wealth inequality, told me that Fed statistics show that pension wealth accounts for 70.3% of the net worth of the middle class, which he defines as people ranking in the 20^th^ through 80^th^ percentiles in terms of wealth. By contrast, he said, retirement benefits are only 2.2% of the upper class’ wealth.

This makes the middle class particularly vulnerable to rising rates in the future. Let’s take this piece by piece.

For starters, near-zero rates are making the financial problems of the already-stressed Social Security system worse than they would otherwise be 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 that the fund’s interest yield is falling and it’s not benefiting from the 50% rise in stock prices since the market bottomed on March 23.

The near-zero rates also affect private pensions. David Zion of Zion Research estimates that the pension funds of the Standard & Poor’s 500 companies, which he says were 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. (I’ll explain the math behind lower rates raising pensions’ underfunding in a bit.)

Large as it is, the S&P companies’ total 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, the most recent available number, up from $1.90 trillion as of year-end 2019. This has happened, he said, even though the funds’ assets totaled about $4.65 trillion, an all-time high.

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 to these funds’ financial status than the numbers from Brainard’s organization suggest. For instance, Steve Church of Piscataqua Research estimates that the shortfalls of the 127 public pension funds that he follows, which have a total of about $4 trillion of assets, are 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 have on hand today based on the income it expects to earn on its portfolio. Corporate pension funds engage in the same process, but they 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% a year, compounded, today’s cost of that benefit — what numbers crunchers call its “present value” — shows up on its books as a liability of $5,083. If, however, the fund predicts it will receive 3% 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,” Steve Foresti, chief investment officer of Wilshire Consulting, said.

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 and has pretty much kept them there.

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%, now has authority to borrow up to 20% 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’ chief executive, told me. “We can tie up our capital for a long time. …We are able to be opportunistic.” However, as Frost readily acknowledges, “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 investment portfolio to 7.25% from the previous 8%. 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 pension fund to avoid the fund having to slash future benefits.

Jase Auby, TRS’ chief investment officer, says the fund has been borrowing 4% 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% a year. TRS says there were no specific assets financed by its borrowings​, but it’s ahead so far because its ​total fund return has exceeded its 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) and 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% market drops in the past 20 years — and low-yielding Treasury securities will lose value if interest rates move higher.

How can U.S. Treasury securities lose value, given that the federal government can create as many dollars as it needs in order to redeem its obligations? Let’s say that you spend $10,000 to buy a 10-year Treasury note yielding 0.76%, the current rate. You’d collect $76 in interest a year, $760 over the issue’s lifetime, before getting your $10,000 back in 2030.

But let’s say that a year from now, despite Fed Chair Powell’s predictions, the rate on such a security has risen to 1.76%, around where it was for parts of last year. The market value of your now-nine-year security would be only about $9,174, according to my handy-dandy online bond calculator. That $826 decline in value is more than the total interest you stand to collect over the Treasury note’s lifetime. You can take your loss directly by selling your security, or you can take it indirectly by collecting $76 of annual interest for 9 years rather than the $176 that holders of market-rate securities would be getting.

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 readily 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 to what the future holds.