How Zero Interest Rate Policy Clobbers Seniors
The Fed's announcement that it would keep interest rates at nearly zero until unemployment falls below 6.5 percent was, by most measures, good news. Although cheap money has proven to be no great solution to a weak economy, it has had some positive effects. Just ask anyone who has managed to refinance their home and now has extra spending money every month.
But let's never forget that zero interest rate policy, or ZIRP, is devastating for seniors living off their savings. ZIRP has totally confounded traditional financial planning for the elderly, leaving millions of people with far less income than they thought they would have.
The trajectory of retirement savings typically goes like this: When you're young, you put all your money in stocks and seek maximum returns. Then you change the mix as you get older until, in your golden years, most of your money is in low-risk bonds and CDs that yield a modest but steady return. During past periods, such investments could bring in between 4 and 6 percent a year. Not bad, especially if you have a big nest egg.
With ZIRP, though, seniors are barely making any income at all from such investments and, in fact, are actually losing money with inflation higher than the rate of return on low-risk savings.
Yet it's not prudent for seniors to swap their money back into stocks given the volatility of markets in this day and age. So all they can do is basically keep losing money and wait for the end of ZIRP.
Meanwhile, the single biggest winners from ZIRP are banks. They are basically getting free money from the Fed and then lending it out to make enormous profits. While mortgage rates may be low, the average credit card interest rate right now is 16 percent.
Oh, and one other thing: It turns out that seniors have increasingly turned to credit cards to make ends meet. Demos first documented this problem in a 2004 report, Retiring in the Red, and we're about to release new data that updates this finding.
Talk about a Catch-22: Seniors get whacked by ZIRP and then whacked again when use their Visa card to stay afloat. Meanwhile, the banks -- as always -- win big.