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

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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.  

Addendum:

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.