George Hohmann: Low interest rates hurt seniors
CHARLESTON, W.Va. -- Ultra-low interest rates are hurting senior citizens who depend on interest generated by their nest egg to help pay for necessities.
In the mid-1990s, one senior citizen I know received about 7.8 percent on a long-term certificate of deposit. His nest egg generated almost $550 a month. Now he receives less than 2 percent interest on his certificate of deposit. His nest egg generates less than $100 a month.
Thousands of senior citizens can tell similar stories -- especially in West Virginia, where 16.2 percent of the population is 65 or older.
The Federal Reserve's Federal Open Market Committee, which determines the nation's monetary policy, is responsible for the ultra-low rates. The Fed is trying to stimulate the economy -- specifically, the housing market.
One outcome of the Fed's policy: mortgage interest rates are at or near historic lows. If you have good credit, you can get a 30-year fixed-rate mortgage with an interest rate under 4 percent.
But another outcome: seniors who depend on interest from savings are struggling to make ends meet.
According to a study released earlier this month by the Manhattan Institute, 10 percent of seniors' income comes from interest on savings.
"If interest rates were 2 percent rather than 1 percent, the average senior would have an additional $3,200 in income," according to the study. "If rates were 4 percent, the senior would have an additional $9,500. If rates were 6 percent, the senior would earn $15,800 more per year."
The study points out that low rates do have a positive impact on some portions of seniors' investment portfolios. For instance, low rates cause the value of equity investments and housing to rise.
Even so, "the effect of low interest rates falls disproportionately on those who save and who live off of savings," the study said. "Frugality is punished."
Thus it is clear: The Fed is picking winners (homebuyers and other borrowers) and losers (savers).
Earlier this month Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, spoke at the 19th annual West Virginia Economic Outlook Conference, presented by West Virginia University's College of Business and Economics at the Civic Center.
Lacker spends a lot of time thinking about the Fed's monetary policy. This year he is serving on the Federal Open Market Committee.
At a press conference following his presentation, Lacker was asked about the impact ultra-low rates are having on senior citizens and what investments he recommends for seniors to generate interest.
"We are well aware that low rates are squeezing incomes, particularly of the elderly," Lacker said. "We take that into account. We realize it is a hardship."
He did not offer investment advice.
Meanwhile, the Fed has said it plans to keep interest rates ultra-low through mid-2015.
Reach George Hohmann at email@example.com or 304-348-4836.