Bailout

Retiree income datapoint of the day

By Felix Salmon

The group of people hit hardest by interest rates are those used to living on interest payments. “The elderly and others on fixed incomes have been especially hard hit,” reports Stephanie Strom. But just how hard have they been hit?

?The unemployment situation and the general downturn in the economy had an impact, but what?s going to happen now as C.D.?s mature is that retirees and the elderly are going to take anywhere from a half to three-quarters of a percent cut in their incomes,? said Joe Parks, a retired accountant in Houston on the advisory board of Better Investing, an organization that works to help people become savvier investors. ?It?s a real problem.?

A cut of as much as three-quarters of a percent? Somebody call 911! The median income for households where the householder is 65 and over was just under $28,000 in 2006. If low interest rates have hit that by 0.75%, we’re talking about a drop less than $20 per month. Is that “a real problem”, when Barack Obama is sending out $250 checks to everybody drawing Social Security, just ‘cos he’s a nice guy? I don’t think so.

Low interest rates are one way of trying to bring down the number of people getting laid off, when unemployment can reduce your income by 75%, rather than by 0.75%. Remember that Social Security payments are going up, not down (for no good reason), and in any case there’s no rule saying that anybody has to keep their principal untouched, and live only on interest payments. For that matter, there’s no rule saying that people who live on interest payments have to invest their money in risk-free investments.

The fact is that even if interest rates were 5% rather than 1%, you’d still need a $400,000 nest egg to earn $20,000 a year in interest payments. Right now, the economy is facing much bigger problems than the plight of individuals with $400,000 of liquid cash in the bank. And what’s more, we already have a safety net for retirees — it’s called Social Security, and its generosity is a serious fiscal issue going forwards.

So you’ll excuse me for not getting particularly exercised about the plight of savers in a low-interest-rate economy. If they want higher returns, they can take some risks with their money, and if they want to spend more, they have large nest eggs just sitting there for the spending. They certainly shouldn’t be a serious part of the deliberations at the Fed over whether and when to raise rates.

(One thing worth adding here: it’s possible that Parks misspoke, and that what he meant was that retirees were going to take a cut of up to 0.75 percentage points in the interest rate they could get on maturing funds. But that of course tells us nothing about their total income.)

Full post as published by Macroprudential on December 26, 2009 (boomark / email).