Retiree income datapoint of the day

By Felix Salmon
December 27, 2009
Stephanie Strom. But just how hard have they been hit?

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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.)


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Perhaps he meant 50-75%, as in interest rates dropping from 4% to 1-2%.

Posted by JamesBShearer | Report as abusive

“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”

That’s right. Which means that if your interest rate gets cut from 1.5% to 0.75%, you see a 50% reduction in interest income. Ouch.

From the article:
“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”

Posted by DanHess | Report as abusive

yep, i agree with the two previous commenters; i have a maturing CD that was paying 5%…no way to match near that…for someone relying on CDs for income, they are hurting…

Posted by rjs00 | Report as abusive

But Felix’s point stands: anyone who is relying on interest income is already much richer than the median retiree. These aren’t the folks to worry about.

Posted by leg | Report as abusive

The point remains: retirees who prudently planned and saved for their retirement – in many instances in amounts that they reasonably expected to be sufficient – are now finding that their savings are insufficient because, in effect, they’re subsidizing those who imprudently didn’t save or who took imprudent risks, including banks. They’re not expecting anyone to get particularly exercised about the plight, but they were expecting and are entitled to be treated fairly, and the article pointed out how they’re not. Not discussed in the article is how both the House’s and Senate’s bills would have retirees disproportionately bear the costs of funding health insurance for the uninsured by targeting Medicare cutbacks. There’s a massive generational wealth redistribution, taking from the older generation for the benefit of younger people, under way. The protesters of forty years ago, now elderly, are seeing one consequence of their repudiation of their elders. Culturally, the old, once valued and respected – classically, biblically, and historically, and until relatively recently – have come to be seen as a burden. That shows even in small details: children rarely offer their seats to elderly people, while adults offer their’s to children.

Posted by 10024 | Report as abusive

I agree with Felix’s point. There’s no such thing as a risk free return; it’s just a question of what risks you are capable or willing to bear. I have a quibble with the approving link to Leonhardt’s stupid article. Also, there was a perfectly good reason to increase the amount to seniors. It’s good stimulus.

Leonhart’s criticism is stupid. Two thirds of Social Security beneficiaries receive at least 50% of their income from social security checks. For twenty percent of beneficiaries, it is their only source of income. So there is a good reason for their income to go up (by the fantastic sum of $250).

Considering that most SS recipients aren’t rich and are in the “dis-saving” period of their life, it was targeted to a class of people who would spend the money. This makes for better stimulus than almost any other class you could consider sending out $250 to.

You could argue that the program was poorly targeted / implemented in that SS has the capability to tie the payments to income. But that underestimates the burdens placed on administrating the payments. As a SS employee, I know first hand that the economic recovery payment was an extremely smoothly run initiative.

As to the second half of Leonhart’s argument regarding entitlement reform, clearly he doesn’t know what he’s talking about. SS payments to newly entitled beneficiaries are tied to annual Wage growth AND the CPI. So if the 27% reduction in benefit payments to new retirees does become necessary in 2039–ie if SS is not fixed–the real amount paid to beneficiaries will still be higher than beneficiaries earn now.

Posted by Some-Guy | Report as abusive

When economic policymakers talk about “stimulating demand”, they are not, despite the usual connotation of “stimulation”, talking about pleasurable experiences. They are talking about forcing people to spend their savings.

Low interest rates are one way of doing that. And, by the way, if we are going to get out of the current economic doldrums, increasing demand is one of the things that has to happen. If you disagree, look up “Japan”, and the reasons why all those prediction of a Japanese takeover of the world economy didn’t actually happen.

Posted by MattF | Report as abusive

Here’s another reason not to lose any sleep about seniors/savers. It’s quite possible that they are better off in the current ZIRP environment, for tax reasons. Interest on savings is taxed as ordinary income, but when interest rates are zero, there is no tax. Still, when real, as opposed to nominal, interest rates are positive, as in the current deflationary environment, the senior/saver has a real increase in net worth. But, this increase is untaxed, because the tax code only recognizes gains from nominal interest income. In fact, the biggest loser in deflation is the government, which loses the revenues that the inflation tax imposes on prudent savers.

Posted by maynardGkeynes | Report as abusive

You’re all missing an important point: My late mother used to have enough income from SS and a pension and would spend basically all that she earned from her CDs. When rates were high, she spent more; when Greenspan lowered rates she spent less. I know other people who did pretty much the same. And no, we will NOT be ‘forced’ to spend more than we earn. In fact, regardless of the economic merits, it’s classic taxation without representation – actually more like expropriation. Zero rates means zero spending – all this talk of stimulus from low rates is nonsense. Check it out.


Posted by Ludovico | Report as abusive

Not saying it can’t be done, but you’re not likely to be living too well on $28/yr and probably noticing that Social Security isn’t operating with great alacrity or anything that could be termed generosity, these days.

The potential for economic enslavement of the American elderly, infirm and anybody else who can’t stand up for themselves is far too grave to disregard, or even quibble over.

Meanwhile, if this discovery doesn’t set your teeth on edge - ss/24trading.html?_r=1&em=&adxnnl=1&adxn nlx=1261707835-ayU9fzFyp9l+5LL6DbC6aw

- then you don’t have much of a heartbeat. Not for the elderly, probably not for anyone else among the living, unless you include TARP-ripping zombies.

One nation under Goldman, America’s not such a great place to grow old in any more.

Posted by HBC | Report as abusive