For the past several years the U.S. government, courtesy of Federal Reserve Chairman Ben Bernanke, has been looking at interest rates through the wrong end of a telescope, and watching them get smaller and smaller until they have all but disappeared. The result: Americans who are retired, and trying to supplement their Social Security benefits with some income from their savings, have been forced to take a huge pay cut.
Interest rates for American savers are currently below inflation rates. According to the U.S. Bureau of Labor Statistics, inflation for 2013 is running just shy of 2 percent. But if you want to keep your money safe and secure, and invest in a five-year U.S. Treasury bill, you get paid only about 1 percent interest, or about half the current rate of inflation. If you go to the bank to buy a certificate of deposit, you’ll get even less than that. And if you keep your savings in a money market mutual fund, you’ll get virtually nothing. The going rate is a barely perceptible 0.01 or 0.02 percent.
A little arithmetic will illustrate the point. If you've done a good job of saving money over the course of your career, and you have $1 million in the bank (a lot better than most people), how much income will you receive from your CD at current rates? About $700 or $800 a month. And as everyone knows, that doesn't go very far in paying your bills. Plus, the $700 or $800 would be subject to federal and state income taxes. So you’d likely have even less than that.
Meanwhile, if inflation is running at 2 percent, but you can only get a 1 percent return on your savings, then even if you don't spend any of it, you are still losing purchasing power. It's not a good situation for anyone who is saving for their future. Trying to save money to buy a house, send your child to college or prepare for retirement is a fool’s game right now. You’ll just be losing ground. The more you save, the more you lose.
But these artificially low interest rates are especially punishing for retired people trying to supplement their income with interest from a bank or a bond fund. It also hurts seniors who might want to buy an annuity or get a reverse mortgage. One result is that senior citizens are deprived of income they need to live. Another result: many retirees have reached for higher income by purchasing corporate bonds or dividend-paying stocks. This strategy has worked, so far. But it exposes the elderly to the gyrations of the markets, at a time in life when they can least afford to suffer a financial loss.
In the U.S., over 40 million retired people live on Social Security. Many, like me, rely on interest from their savings to supplement their standard of living. But over the past few years that income has been squeezed down, and then down further, to almost nothing.
Of course, the low interest rate policy is a good deal for the federal government, which is borrowing money like an addicted gambler. It’s also been a big help to the real estate industry, as well as banks and financial institutions. And super-low interest rates have helped bail out the auto companies. Remember when the automobile executives flew on their private jets to Washington to beg for money? We seniors are still paying that bill.
To be fair, the artificially low interest rates set by the U.S. government have also helped people applying for a mortgage or a car loan. Although it doesn’t help, as many young people have discovered, if you don’t qualify for the loan.
But for the 60-plus crowd, it's meant nothing but financial distress. And 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?
So, Ms. Yellen, may I suggest that the Fed has been helping out the banks and the auto companies long enough. When you take over, how about helping out some retirees for a change? How about raising those interest rates so we can earn a little bit of income from our retirement savings?
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. Don't you?
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.