Fed’s Low Interest Rate Penalty for Seniors: $250 Billion
Federal Reserve Chairman Ben Bernanke has been somewhat apologetic to seniors in recent months about the central bank’s low interest rate policies that have turned retirement calculations upside down for anyone thinking that a nest egg, in many cases built over an entire lifetime, could provide a decent stream of income when invested in assets that are virtually “risk free”.
Despite excessive risk taking being at the heart of the financial market meltdown a few years back that led to the deepest recession since the Great Depression, the Fed’s policies in its aftermath have been all about encouraging risk again and, about the only thing the Fed chairman can offer up to seniors (as short-term interest rates come up on their four-year anniversary of being stuck at the freakishly low rate of between 0 and 0.25 percent) is that, their home price might rise with an improving U.S. economy, presumably allowing them to further enrich bankers by taking out a reverse mortgage to help make ends meet.
So, it was interesting to see that the Fed’s low interest rate penalty for seniors was codified in this USA Today op-ed yesterday by 75-year old Charles Schwab in which he blames the nation’s politicians for doing nothing, making monetary debasement by the Fed the only game in town.
One arm of the government, the Fed, has decided to lower interest rates to near zero. They say it will help improve employment, and absent leadership from the Obama administration, they believe they’re the only game left in town. Growth has not happened yet; unemployment has remained above 8% for most of the past four years.
Two other arms of the government — the White House and Congress — have yet to compromise on an economic policy to get a solution. To add insult to injury, interest rates on savings in the U.S. are lower than nearly anywhere else in the world. Most countries pay substantially higher rates.
Unfortunately, because the Fed has set these low rates, since 2009 savers have had to draw on their principal to supplement their retirement income. They also have been harmed further because of modest inflation. The purchasing value of their savings principal has dropped by at least 8%.
How much interest have Americans lost? If instead of earning a 0% interest rate for these four years, the rate had been closer to the more historically normal 3.5%, that would have put more than $250 billion of interest into savers’ pockets each year.
Not surprisingly, this commentary also serves as an endorsement of Governor Romney over President Obama, but, for someone in a position of power writing about the economy these days, it’s probably hard to write anything on this subject without being partisan.