Raise Our Interest Rates, Please
Last week the entire financial world was on tenterhooks, wondering whether or not Janet Yellen and the Federal Reserve would dare to raise interest rates -- which are now at virtually zero percent -- by a quarter of a point. I turns out, they didn't. Interest rates are still at zero.
For most of the last decade -- ever since 2007 -- the U.S. government, courtesy of the Federal Reserve, has been looking at interest rates through the wrong end of a telescope, 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 so low, they're even below our current low inflation rate. According to the U.S. Bureau of Labor Statistics, inflation for 2015 is running about 1 percent, depending on what measure you use. (Inflation in energy is actually negative, but for health care it's over 2 percent.) If you want to keep your money safe and secure, and invest in a two-year U.S. Treasury bill, you will get paid less than 1 percent. So you're actually losing purchasing power. If you go to the bank to buy a certificate of deposit, or if you keep your savings in a money market mutual fund, you'll get virtually nothing. The going rate is less than a tenth of a 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, you will receive about $500 or $600 a month from a five-year CD. That's pretty paltry for a millionaire, and doesn't go very far in paying your bills. Plus, the $500 or $600 is subject to federal and state income taxes. So, you will likely get even less than that.
The 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 is many retirees have reached for more income by purchasing corporate bonds or dividend paying stocks. This strategy has worked, so far. But it exposes our elderly to the gyrations of the stock market, at a time in life when they can least afford to suffer a financial loss.
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 to almost nothing.
But it's not just seniors. Low interest rates punish anyone who is saving for the future. Trying to save money to build up equity to buy a house, send your child to college or prepare for retirement is a fool's game. The more you save, the more you lose.
Of course, the low interest rate policy is a good deal for the federal government, which is borrowing money. It's also been a big help to the real estate industry and the auto industry, as well as banks and financial institutions. The artificially low interest rates 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 can't qualify for the loan. But for the 60-plus crowd, it's meant nothing but financial distress.
So, perhaps the Fed has been helping out corporate America long enough. Maybe it's time to help out retirees for a change. How about raising interest rates so we can earn a little bit of income from our retirement savings? 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 blogs at Sightings at 60.