For the past several years the U. S. government, courtesy of Federal Reserve Chairman Ben Bernanke, has been stepping on interest rates. And if you have saved any money, you’re the one who is getting crushed.
Interest rates for American savers are below inflation rates. According to the U. S. Bureau of Labor Statistics, inflation for 2011 is running at 3.9 percent. But if you want to keep your money safe by investing in a five-year U. S. Treasury bond, you only get paid 0.9 percent. If you look around, you might find a five-year CD at a U. S. bank that would offer 1.25 percent interest. But if you keep your spare cash in a money market mutual fund, you’ll get virtually nothing. The going rate is a minuscule 0.01 or 0.02 percent.
If inflation is running at 3.9 percent, but you can only get a 1 percent return on your savings, then you’re better off spending your money right away, before it loses its purchasing power. Trying to save money to build up equity for buying a house, sending your child to college, or saving for retirement is a fool’s game. You’ll just be losing ground.
The situation where interest rates are below the inflation rate is not a good thing for anyone who is trying to save for their future. It’s especially punishing for retired people trying to supplement Social Security with interest they receive from a bank or a bond fund. It also hurts seniors who might want to buy an annuity or get a reverse mortgage. Over the past few years, senior citizens have taken a dramatic pay cut in the form of less interest on their savings.
A little arithmetic will illustrate the point. If you want to supplement your Social Security payment, but keep your savings in a nice and safe bank CD, how much would you need to give you the fairly modest income of $1,000 a month? Almost $1 million. And that $1,000 a month would be subject to federal and state income taxes. So you’d really need more than a million.
A few years ago when I was forced into early retirement, I left with a reasonably respectable lump sum payment. I took a chunk of that money and stashed it in a nice, safe money market fund. It paid $700 or $800 a month in interest and provided me with a little financial cushion. But today, that same amount of savings pays me a paltry $25 a month.
About 40 million retired people live on Social Security. Many retirees, like me, rely on interest from their savings to supplement their standard of living. And Bernanke has forced all of us to take a big pay cut.
Of course, Bernanke's low interest rate policy is a good deal for the federal government, which is borrowing money. It’s also been a boon to banks and financial institutions. Low interest rates have additionally helped people taking out a car loan or applying for a mortgage. But it doesn’t help if you don’t qualify for the loan, as many young people have discovered.
For the 60-plus crowd, low interest rates have meant nothing but financial distress. Do you really think it's fair that senior citizens who have saved up a bit of money for their retirement should be the ones bailing out Wall Street? Besides, a lot of retired folks, if they got a little better yield on their CDs, would go right out and spend that money. I think they'd do a better job than the banks in stimulating the economy.
So, Mr. Bernanke, help out some older people. Raise those interest rates.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.