By John RubinoWhile we're on the subject of inflation's immorality, consider the impact of the dollar's destruction on retirees.
Citizens who work hard, save, and eventually retire with money in the bank are the bedrock of a stable society. In a rational world they would be held up as examples for the rest of us to emulate, and public policy would aim to create the highest possible number of self-reliant seniors.
Instead, four decades of soaring government spending, borrowing, money printing and public/private corruption have left the US with the historically-all-too-familiar dilemma of "inflate or die". Translated into policy, this means keeping interest rates at rock-bottom levels in order to ease the pressure on "consumers" who the government previously encouraged to go deeply into debt - and to convince the rest of us to leverage ourselves to the hilt with mortgages and car loans.
So a retiree who had enough interest income to live comfortably when CD rates were 7% is destitute with rates at 1%. And with the cost of living rising by far more than 1% a year, their remaining principal is evaporating. They did everything right according to the wisdom of their upbringing, but somewhere along the way society changed the rules. Now "right" is defined as taking out the biggest possible mortgage and using plastic to buy a 60-inch plasma TV from China. Saving is dangerous because it depresses consumer spending. And dependency on social programs is the norm for retirees instead of the unfortunate exception.
Seen this way, inflation and interest rates are a civil rights issue. Government, by favoring borrowers over savers, is destroying the lives of millions of people who don't deserve it and can't defend themselves. And it's creating a future generation of retirees who didn't save a dime because it seemed pointless.
The only consolation is that the mainstream media is starting to sense a story. Here's a brief excerpt from a much longer article in today's Wall Street Journal. Anyone with access to that paper should read the whole thing:
Fed's Low Interest Rates Crack Retirees' Nest Eggs
PORT CHARLOTTE, Fla.-Forrest Yeager, a 91-year-old resident of this seaside community, had been counting on his retirement savings to last until he died. The odds are moving against him.
With short-term bank CDs paying less than 1%, the World War II veteran expects his remaining $45,000 stash to yield just a few hundred dollars this year. So, he's digging deeper into his principal to supplement his $1,500 monthly income from Social Security and a small pension.
"It hurts," says Mr. Yeager, who estimates his bank savings will be depleted in about six years at his current rate of withdrawal. "I don't even want to think about it."
Mr. Yeager is among the legion of retirees who find themselves on the wrong end of the Federal Reserve's epic attempt to rescue the economy with cheap money. A long spell of low interest rates has created a windfall worth billions to banks, mortgage borrowers and others it was designed to benefit. But for many people who were counting on their nest eggs, those same low rates can spell trouble.
Mr. Yeager's struggle highlights a nagging dilemma facing Fed Chairman Ben Bernanke. The longer the central bank keeps interest rates low to stimulate the economy, the more money it pulls out of the pockets of millions of savers. Among the most vulnerable are retirees, who have few options to restore lost income on investments built up over entire lifetimes.
In 2009, according to the most recent data available from the Labor Department, average annual investment income for the 24.6 million American households headed by people 65 and older amounted to $2,564. That figure is down 34% from 2007, and is the lowest since 2003. A recent survey by the Employee Benefit Research Institute indicated that one in three retirees had dipped deeper than planned into their savings to pay for basic expenses in 2010.
Most economists agree that the Fed's interest-rate policies, together with other measures, have helped avert a much deeper economic slump. Still, the situation for savers has become progressively worse since the Fed first lowered its interest-rate target close to zero in late 2008.
As of January, the average interest rate paid on relatively safe vehicles such as short-term savings accounts, time deposits and money-market funds stood at only 0.24%. That's one-tenth the level of late 2007 and the lowest on records dating back to 1959. Such depressed rates don't come close to compensating for inflation, which was running at an annualized rate of 5.6% in the three months ended February.
Low rates don't just hurt retirees. They also penalize people of any age hoping to build up funds for the future, and discourage rainy-day savings that could make U.S. consumers more resilient to job losses and other financial jolts. Americans' net contributions to their financial assets, such as bank and 401(k) accounts, amounted to 4% of disposable income in 2010, according to the Fed. That's the lowest level since it began maintaining records in 1946-except for 2009, when people actually pulled money out.
A few thoughts:
Sorry for the rant that opened this post. But what's happening to retirees is one of this century's great injustices, and also one of the most under-reported. Maybe because it's too ideologically complex, with easy money policies - usually thought to produce good things like jobs and higher government spending - suddenly a force for destruction. That's a hard concept for most reporters to wrap their heads around.
Another reason that the plight of retirees in a low-interest-rate world isn't news is that easy money is seen as the only alternative to another Great Depression. So old folks are collateral damage in a just war. Which leads to a crucial point: Today's policymakers are not the only villains. The people who put us in this box go all the way back to the creation of the Fed in 1913, and they populate both major parties. Virtually no part of the US ruling class is immune from blame.
The WSJ article had some surprising stats, like this one: "In 2009, according to the most recent data available from the Labor Department, average annual investment income for the 24.6 million American households headed by people 65 and older amounted to $2,564. That figure is down 34% from 2007." Is that really all the average retiree makes from their savings? Two hundred bucks a month? Hope their homes are paid off...
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