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Home Publications Blogs Beat the Press Few Seniors Have Large Amounts of Money Invested Exclusively in Short-term Accounts

Few Seniors Have Large Amounts of Money Invested Exclusively in Short-term Accounts

Friday, 19 April 2013 04:59

The Post had a lengthy piece about seniors being ripped off on their savings by scam artists promising high returns. While this is a serious problem, the article implies that the low interest rate policy by the Fed is a major factor pushing seniors in this direction.

Actually, very few seniors have large amounts of money in short-term accounts that would be hurt by the Fed's low interest rate policy. According to Federal Reserve Board's latest Survey of Consumer Finance, around 15 percent of seniors have $25,000 or more in short-term money. Most of these people are likely to also have money in stock, which has provided very good returns in the last three years. They may also hold longer term bonds, the price of which has risen sharply as interest rates fell.

Even if a senior just held their $25,000 in short-term money, the hit from the low interest rate policy would still be limited. If we consider a 3.0 percent interest rate to be normal and assume that they are now getting a near zero interest rate, the loss to a senior with $25,000 would be around $750 a year. This is approximately the same hit that a senior with a $20,000 annual Social Security benefit (roughly 30 percent above the average) would see after 13 years under President Obama's proposal to change the base of the cost of living adjustment to the chained CPI.  


I see from comments that folks really want to believe that this low interest rate policy is a horrible disaster because every senior you know has huge amounts of money in CDs. That's nice, but I prefer arithmetic. My hypothetical case refers to someone with $25k in short-term money; a group that comprises around 15 percent of all seniors. I know that people want to say that seniors don't hold any stocks or bonds, but the Fed's data disagrees and there will be enormous overlap between the people who have substantial stock and bond wealth and those with $25k in short-term money. (Sorry, I don't have time to analyze the micro data just now.)

This means that the number of people who are hit by the low interest rates and not seeing some offsetting benefit from higher stock or bond prices will be considerably less than 15 percent of seniors, let's say between 5-10 percent of seniors. This group will be seeing a hit that is comparable to the hit from the chained CPI. Note, I did not say this was a small hit. My point is that it affects a relatively small share of seniors. The chained CPI will hit virtually all seniors, the vast majority of whom do not have $25,000 in financial assets of any type.

Comments (14)Add Comment
Interest rates
written by Kaleidic, April 19, 2013 8:04
Just the other day Dean was arguing that a rise in interest rates would be immaterial because existing government debt could be retired at a lower price ignoring the cost of refunding and new issues. Now low rates are immaterial because the value of existing bonds has risen, once again ignoring the negative real rates on rollovers and new purchases, plus of course the tremendous hit that would be taken on bond mutual fund values if there were to be a substantial rise in rates. Not even considering that due to QE the stock market is hugely overvalued and subject to a potential crash.
$750/yr is a big hit when you make $25K
written by Dennis Doubleday, April 19, 2013 8:20
You yourself have been making that point about chained CPI, repeatedly. Now it's not a big deal?
written by AlanInAz, April 19, 2013 8:44
A senior losing $750 today is a bigger deal than a senior potentially losing $750 thirteen years from now (should they still be alive). Your general argument that unemployment is a bigger overall problem than low savings return is valid but your rational about the importance of savings is off the mark.
written by skeptonomist, April 19, 2013 8:50
Dean and many other economists and non-economists have been following Krugman in calling for inflation. This is supposed to come about by the Fed promising not to raise interest rates even if inflation does kick up in the future. The idea is highly conjectural (not to say magical), but the effect on cash assets of substantial inflation combined with low short-term rates is predictable - the assets will lose value. Seniors might avoid loss of value by putting their money into the stock market, or into real property, or into commodities that are supposed to hold value like gold, but there is danger of catastrophic loss in these things. Little has been done to prevent asset bubbles or to curb financial overexpansion.

If you are retired or near retirement and expect to get a substantial fraction of your income from savings rather than SS, it is hard to visualize a scenario in which you would not be hurt by increased inflation if interest rates are held low. The amounts involved could be considerably greater than those involved in the change in CPI indexing method on SS benefits.

I am not recommending that the Fed raise interest rates, but pointing out that inflation has consequences that do not seem to have been fully considered by those who claim that inflation would be beneficial.
written by David, April 19, 2013 9:01
Dennis, a senior with $25k in a low interest account calls it their checking account our maybe their rainy day fund. A senior who relies solely on their $20k per year in SS has never seen that much money in one place their entire life.
written by David, April 19, 2013 9:07
Skepto, the zero lower bound and a strong dollar keeps that inflation caged. But those are working against the employable unemployed.
written by AlanInAz, April 19, 2013 9:39

You are wrong, my parents relied very heavily on SS and they indeed had $25k in revolving CD's. I believe this to be common among many seniors.
written by David, April 19, 2013 1:57

Well, reality is more complicated than what I said, mea culpa.

So your parents are part of the 15% that the Fed reports. Congratulations to them. According to the Census of 2010, the median net worth of seniors, with the house taken out, is about $28.5k. But that is the median. That includes 401(k)s, pensions, IRAs etc. Now presume the (houseless) net worth of seniors in the 15% is distributed as it is in the general population (not likely, I bet that the median (houseless) net worth among the 15% is higher than $28.k). That means of that at most 7.5% of all seniors would fit your parents description.

In addition, your parents would be pulling in two SS checks (about), so nearly $40,000. No doubt the loss of $750 in annual interest income (minus taxes, so more like $550) will hurt. Especially for single males seniors, who saved less than the females and don't have a partner to help carry shareable expenses.

Does all that mean the Fed should raise rates? Because if they do, the general employment situation will worsen. Somebody has to suffer. Unless the do-nothing Congress jolts the economy back to life with a stimulus.

In any event, SS benefits need to be increased anyway, not decreased. And probably supplemented (based on net worth) in these times at the ZLB.
Least damage possible
written by Jennifer, April 19, 2013 3:50
There are always going to be winners and losers in monetary policy. I think the point is, you want those with the least to be hit the least. As Dean has pointed out in many posts, the majority of seniors have marginal, in any money in savings. The ones that do tend to have more money anyway. Chained CPI will hurt ALL seniors, especially those who are the poorest AS well as other populations. There is also the general argument that a better economy-which low interest rates should promote- will benefit everybody, including seniors. Also, I think a point here is that the same people who are yelling about low interest rates are the same people who are claiming a chained CPI is no big deal.
Which World?
written by James, April 19, 2013 4:56

I often agree with Dean even in this case but his statement, "Most of these people are likely to also have money in stock, which has provided very good returns in the last three years. They may also hold longer term bonds, the price of which has risen sharply as interest rates fell," seems little disconnected with reality of principal perservation for a elderly.

If an elderly or senior holds $25K in ST liquid CD, the inv't principle for that person givne his life expect. should be capital perservation so whatever stock mutual or bond funds might not be as big as the most saftest asset, i.e., ST money.
written by AlanInAz, April 19, 2013 5:24
I am not advocating higher rates nor chained CPI. I do think Dean Baker understates the impact on a significant segment of seniors, especially those who struggled through their lives to save some money. The seniors with $25K in savings will likely not be invested in the stock or bond markets and do rely on short term interest rates. I find it a significant failing of economics that the only policy tool available throws a deserving group under the bus for the greater good.

Sorry for Catherine Rampell, but her nyt piece needs a reality check
written by JaaaaayCeeeee, April 20, 2013 6:25
Although Floyd Norris mentions today that emerging economies don't have to practice austerity and contract, most nytimes news is tortured efforts not to irritate debt/deficit hawksters. Check out the lead Business section article on part time work:
despite 30 straight months of job growth [and] the better job market... hiring has been low-wage, temp, and part time with household incomes down.

Unfortunately, the only causes cited are low demand, uncertainty, corporate uncertainty about access to financing, the uncertainty of Obamacare, and other cost and efficiency pressures on employers, independent of public policy or the business cycle (yeah, no citation, but this last at least contradicts Krugman - is that fair and balanced?)

Not a word on fiscal policy/austerity. Cappelli at Wharton featured saying that McDonald's needs real brain power, some sophisticated math or software scheduling, unless they just use part time workers, which makes scheduling a piece of cake. (I guess we get to eat it)
Low interest rates affect me but that's OK
written by Mike B., April 20, 2013 8:03
I have some savings, since I have no pension but hope to retire someday. I prefer guaranteed assets, so I am being hurt by low interest rates. That's OK with me. I've been able to beat inflation by a little bit, and I don't think anyone owes me more than that. I'm saving while I'm working in order to be able to spend the money when I've retired, not in order to live off the interest. I wouldn't object to more money, but I don't want it if it costs people their jobs (which increased interest rates might).
written by skeptonomist, April 20, 2013 9:19
There is also an effect on the interest paid on the SS Trust Fund, although that will be very minor from now on as the amounts added are decreasing.

I am not claiming that low interest rates are a horrible disaster, but they do have some effect on retirees. The effect of low interest rates on retirees is small at the current rate of inflation, but if inflation goes up significantly it could be important. I think that Dean and others who advocate higher inflation, which would be accompanied by low policy rates according to their recommendation, have not considered this sufficiently (as well as some other effects of inflation, especially the fact that it would probably decrease real wages).

However, there is historical evidence about what happens when the Fed holds interest rates low for a long time. The discount rate and federal funds were held fairly low from about 1934 to around the end of the 60's (they were very gradually raised until then). Overall economic performance, especially GDP growth, was excellent during this time (unemployment was obviously high at the beginning of this period, but was rapidly reduced). There were some inflation spikes, but they subsided without any interest-rate raises by the Fed. Someone who is paid for economic research and who really wanted to know about the effects of low interest rates, whether on retirement on anything else, might learn a lot by studying this period.

Again, SS benefit and tax levels do not have to be fixed 30 years in advance - if they are considered to be too low at any time, they can just be raised - and they could be indexed to nominal GDP instead of prices. The greater the level of SS benefits, the less retirees and policy makers have to worry about investment return rates, and the less the money flowing through Wall Street.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.