I MISS THE JOYS OF COMPOUND INTEREST. During my grade school days, the concept seemed magical — seed a bank account with a few dollars, nourish it with birthday and holiday loot, and watch a modest stash grow into a virtual money tree. Every deposit marked a financial milestone. When the teller fed my passbook into a chattering machine to update the balance and interest earned — at least 5 percent — I felt richer.
Today, my bank money is hardly working. I’m stuck with a “high yield” account that, over the course of a year, generates less than a penny on the dollar. Certificates of deposit don’t pay much better, and “interest-bearing” checking yields a microscopic profit (about 0.05 percent), minus the monthly fees. Factor in inflation erosion, and saving the old-fashioned way is a losing proposition.
I’m still employed, however, and fortunate to have an employer-matched 401(k), so the sad state of my savings account is more of a frustration than hardship. It’s my mother I worry about. Mom and millions of seniors without pensions depend on savings income to supplement Social Security and individual retirement accounts. They’re hurting because the Federal Reserve, in a series of increasingly frantic moves, hacked interest rates to near zero following the financial crisis that enveloped the world in 2008. By making borrowing cheap, regulators pumped more dough into the ailing US economy, helping it to gain strength.
But enough with the minor league economic analysis. What about poor Mom? She paid off her mortgage, doesn’t owe a dime to MasterCard, and nails the household budget every month. The money from her sweat-earned savings goes to discretionary spending or to offset expenses, such as the new roof she had to put on last month. One way or another, her money is funneled back into the economy, just like the policy makers in Washington want. But now she’s got a lot less to funnel. For example, a 12-month CD that made 3.8 percent five years ago is paying about 0.33 percent this year, according to Bankrate.com.
Some will argue that conservative senior savers shouldn’t expect to collect easy income — less risk, less reward and all that. In hindsight, perhaps more of them should have bought Apple stock, diversified by investing in bonds, or sold a photo-sharing app for $1 billion. But people like my mom also didn’t buy homes beyond their means and use them as ATMs during the housing boom. An increasing number of those folks are receiving bailouts in the form of mortgage loan write-downs, because stemming foreclosures is considered crucial to the country’s rebound. In effect, seniors are being required to sacrifice partly to right the wrongs of reckless borrowers, greedy lenders, and unscrupulous Wall Street firms.
How is that fair, I ask Greg McBride, senior financial analyst for Bank-rate.com, as if anyone should expect fairness from the financial industry. “Seniors have really taken it on the chin the past several years,” he acknowledges. “It’s like Aunt Edna stuffing an envelope full of cash, walking down the street, and giving it to the guy in the big house with the leased automobile who’s up to his eyeballs in debt.”
Feeling badly for Edna, I seek encouragement from Tony Webb, an economist at the Center for Retirement Research at Boston College. “The needs of investors for income are unlikely to be uppermost in the Fed’s minds,” he says, quickly dousing my hopes. “I’m not privy to [Fed chairman] Ben Bernanke’s innermost thoughts, but one can hazard a guess — it’s going to be a few years before rates are raised.”
Until then, I’m afraid, the recovery will remain on hold for many retirees. Due to a lack of interest.