Low Interest Rates Hurt Seniors

March 28, 2014

The Federal Reserve's low interest rate policy hurts older Americans, says Diana Furchtgott-Roth, director of Economics21 at the Manhattan Institute.

Federal Reserve Chairman Janet Yellen suggested that the Fed would begin raising interest rates when the taper is over. These rates need to rise. From the 1970s through the 1990s, Americans could expect a 5 percent interest rate, or even higher, to generate income from their savings for retirement. Today, that figure is not even 1 percent.

  • When the returns of saving are zero, would-be savers are instead encouraged to invest money in risky stocks and bonds. Mortgage rates are also at record lows, meaning that Americans can take on large amounts of debt.
  • Seniors are the ones disproportionately impacted by this situation. In 2012, seniors earned just under 10 percent of their income from interest, whereas Americans ages 25 to 64 earned less than 3 percent of income from interest.
  • According to a McKinsey study, households headed by Americans under the age of 45 are net debtors. These households have benefited from lower rates. Those with household heads ages 35 to 44 have gained $1,700 more in spending each year due to the rates. Those under age 35 have gained $1,500 per year.
  • Seniors, on the other hand, are losing money. Those with household heads ages 75 and above lost $2,700 per year in income, while those between ages 65 and 74 lost $1,900 per year.

A low interest rate policy also hurts the economy as a whole, discouraging lending to the United States on the global market. And when interest rates do rise, our financial system will have difficulty adjusting, as many businesses are based on these low interest rates. While abandoning a low interest rate policy will be tough at first, the entire U.S. economy will ultimately be better off.

Source: Diana Furchtgott-Roth, "How the Fed Is Hurting Seniors," MarketWatch, March 21, 2014.

 

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