How About Bailing Out Responsible Seniors?

The government bails out irresponsible banks and homeowners; how about help for responsible seniors?

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Please let me know what you think about the letter I'm drafting to U.S. Treasury Secretary Tim Geithner. Would you sign it?

Dear Secretary Geithner:

You seem like someone who wants to do the right thing. I bet you spend a lot of your time worrying about the health of our major banks and other financial services companies. So, maybe it's only natural that you've ended up doing the right thing for many of these big companies. I know that your actions are framed as being in the service of overall financial system stability. So, indirectly at least, I'm pretty sure you feel you're doing the right thing for consumers when you help to bail out the banks, look the other way at outlandish compensation packages for people who should be fired, and support Federal Reserve Board Chairman Ben Bernanke in a low interest-rate monetary policy.

You and many other really smart people think this monetary policy is needed to lubricate credit markets, stimulate business lending, and give those financial firms access to free money. By doing do, those firms can rebuild their balance sheets without needing more direct government bailouts. It is, however, a policy that is just devastating to seniors and others who depend on their savings to provide living expenses. You have done what you deplore in others -- shifted interest-rate risk to seniors and forced them to pay for problems they did not create.

[See U.S. News's list of the Best Mutual Funds for 2010, and use our Mutual Fund Score to find the best investments for you.] In the mortgage arena, you and other government leaders have been struggling to do the right thing for homeowners. Some can't pay their mortgages. Many are looking at home values that have fallen to levels that are less than the amounts they still owe on their homes. Some of these homeowners can't pay their mortgage and see little reason not to walk away from their homes. Others may be able to pay the mortgage but also question the financial wisdom of continuing to do so. Many of these people are financially responsible. Others never should have been approved for mortgage loans in the first place. They knew, at some level, that they were gaming the system. Today, the system is gaming them, and they are seeing what fairness looks like from the other side of the transaction. Now, a big expansion of federal mortgage relief programs has been announced. These new programs will help many people who deserve it. They also will help many people who don't deserve it.

For both big financial companies and homeowners who took advantage of the system, your efforts to help have basically rewarded people for doing the wrong thing. They took the risks but we're the ones paying for their mistakes. That provides lots of fuel for Tea Party rallies. It should.

How about a program to help the millions of older Americans who have done all the right things but are still suffering? These are people who did not overextend themselves. They lived within their means. They invested responsibly. They pay their mortgages. Many of them own their homes. But that home may have declined in value from $300,000 to $200,000. They are not knocking on your door. They will not default on a mortgage or walk away from their home. Nevertheless, they have lost $100,000 and this represents a huge financial setback.

They live off of Social Security, maybe a private pension, and their savings. Their Social Security benefits are tied to the Consumer Price Index, and did not rise this year and are forecast not to rise next year, either. Yet their Medicare and other healthcare expenses continue to soar. Their savings are invested conservatively. Many retirees depend on income from certificates of deposit, bonds, and dividends on utilities and other safe stocks. Uncle Sam's free-money policies have devastated these income sources. What are you doing for these people?

[See Best Affordable Places to Retire.]

Maybe you saw the recent opinion piece in The Wall Street Journal from Charles Schwab, founder of the big investment firm. He says people hold about $7.5 trillion in interest-linked investments, and are losing hundreds of billions of dollars in interest income a year in the current zero-rate environment.

"Today's historically low interest rates may be feeding banks' profitability, but they are financially starving our seniors," Schwab wrote. "(T)hese unprecedented low rates have now been in place for almost 18 months. As a result, banks have enjoyed virtually free access to money while retirees have been deprived of any meaningful yield on their fixed-income portfolios. For a large segment of our population -- people who worked long and hard, who followed the rules by spending less than they earned and putting the remainder away to keep themselves independent in retirement -- the ultra-low interest rate is more than a hardship. It's a potential disaster striking at core American principles of self–reliance, individual responsibility and fairness."

Sounds like you might want to look for Mr. Schwab at a Tea Party meeting coming soon to your neighborhood.

Here's a modest suggestion to help seniors and others who would like to save money safely. Create a U.S. perpetual bond that would provide quarterly interest payments equal to the current rate of inflation plus three percentage points. Call it the "Plus 3" bond. Because it's a perpetual bond, the government would never have to repay the principal. Plus 3's might not be attractive in periods of high growth when stocks will far outperform them. But that's not the point. The point is to provide people with a secure investment that protects them from inflation and today's zero-rate environment. At any time, the government would buy back the Plus 3 at face value. You already provide such principal protection with your Treasury Inflation Protected Securities (TIPS).

The government would be able to invest the money it receives (less a small percentage that should be reserved for owner-requested redemptions). It might make enough money from these investments to meet its interest obligations on the Plus 3s without eating into its original bond proceeds. But even if it did need to tap general revenues to keep the program afloat, the subsidy would be modest. Certainly, it wouldn't approach the payouts being provided directly and indirectly to the banks. Including the tax deduction for mortgage interest, homeowners receive far more benefits than would ever be provided to Plus 3 bond holders. And remember, these bonds are designed for the good guys -- the responsible people who did all the right things.

You'd need some safeguards to prevent the government from selling too many of these bonds, which could turn into a Ponzi scheme. You also could restrict their purchase to individuals, and even limit those purchases to households making less than a certain amount of money.

What a great tool the Plus 3 would be for augmenting retirement incomes. A long list of retirement experts is arguing for a new type of retirement investment that provides these features. They don't want Americans to go through another round of 401(k) collapses. You also would see less demand by seniors for social services during hard times. That's become the Plus 3s would be providing them steady income unaffected by a stock market meltdown. And don't you think younger savers would flock to these bonds, too? For them, the interest payments would build up tax free in their retirement accounts.

Thanks for your time, Mr. Secretary. You can reach me here with any questions.

[See Whatever We're Doing, It's Not Working.]