For years, the Federal Reserve's policy of keeping interest rates near 0% has crushed retirees trying to draw income from their life savings. Yet as if the challenge of having to squeeze blood from the Fed's stone weren't enough, now many financial experts are telling cash-strapped senior citizens that they should stop complaining for the good of the country.
In an article in The New Yorker, columnist James Surowiecki argues that the Fed doesn't hate savers. Rather, he points to the millions of working Americans who lack substantial savings and instead have massive amounts of debt outstanding, implicitly arguing that more people benefit from low rates than are hurt by them. Citing figures that senior citizens get only 10% of their income from interest payments, he concludes that the Fed's actions are not only justified but also too conservative for the current economic situation.
It's easy to argue that for the good of the entire country, retirees should bear the brunt of the burden. After all, they do tend to have more savings than younger Americans, having had a whole career to create their retirement nest eggs.
But retirees are far less wealthy than younger Americans in one key asset: the value of their human capital. Younger Americans can look forward to years or even decades of future earnings from wages and salaries -- earnings that will add up to hundreds of thousands or even millions of dollars of income. Even those needy seniors who are fortunate enough to find work largely have to accept low-paying jobs with few future prospects.
Moreover, low rates have also held back growth of other income sources for retirees. Social Security recipients have gotten minimal cost-of-living adjustments in recent years, and although low rates would usually spur inflation that would lead to higher COLAs for seniors, official inflation figures have remained subdued for years -- even as many of the actual costs that seniors pay have risen sharply.
All for what?
Moreover, the benefits of low rates haven't been as clear as many believe. Rates on home mortgages have indeed fallen to extremely low levels, helping to spur housing activity that brought once-struggling homebuilders Hovnanian (HOV 6.60%) and PulteGroup (PHM 1.58%) back to life, with higher orders and sales figures recently.
But many borrowing rates haven't followed the Fed's policy lower. Citigroup (C -0.87%), JPMorgan Chase (JPM 1.41%), and Bank of America (BAC 0.95%) have largely kept credit card interest rates high to bolster their massive profits, with double-digit rates looking especially egregious in light of the less than 1% rates those banks pay most of their savers.
Stop blaming savers
Blaming retirees for their current problems simply adds insult to the injury of having part of their incomes taken away from them. The solution isn't to artificially raise rates, but letting the free market have more of a say in where rates should go would at least give savers a fairer chance to assess their investment options to try to make ends meet.