Twelve years after retiring as a telephone repairman, Roger Wood clocks 12 to 15 hours a week at a Lowe’s Cos. hardware store near Glen Allen, Virginia.
“About the same amount I made 30 years ago,” Wood, 69, says of his $12 hourly wage. “I’m worried about my portfolio because of low interest rates, even to the point of considering full-time again.”
Feeble returns on the safest investments such as bank deposits and fixed-income securities represent a “financial repression” transferring money from savers to borrowers, says Bill Gross, manager of the world’s biggest bond fund. Workers 65 and older, struggling with years of depressed yields, are the only group of Americans who are increasingly employed or looking for jobs, according to Labor Department participation-rate data.
“We’re going to be financially repressed for decades,” Gross, the 69-year-old billionaire co-founder of Pacific Investment Management Co., told Bloomberg Radio Feb. 7, citing Federal Reserve interest-rate policy that aims to cut borrowing costs. “I hate to be gloomy, but, yes, for the next 10 years, the oldsters, and I’m in that camp, are going to be disappointed in terms of the policy rate.”
About 75 million baby boomers, born from 1946 to 1964, are starting to retire and face meager returns as a byproduct of the Fed’s decision to hold its benchmark rate near zero since December 2008. Policy makers also have quadrupled the central bank’s balance sheet to a record $4.22 trillion to drive down borrowing costs.
A 65-year-old who wanted to pay for retirement with annuities tied to bonds needed 24 percent more wealth in 2013 than in 2005, National Bureau of Economic Research President James Poterba calculated in a research paper released in February. The increase followed a drop in yields on top-rated corporate bonds to 3.8 percent from 5.4 percent, according to Poterba, whose organization is the official arbiter of when U.S. recessions start and end.
“The magic of compound interest works very slowly when real rates are very low,” said Poterba, also a professor of economics at the Massachusetts Institute of Technology in Cambridge. “Interest rates that have prevailed for the last few years have made it more challenging for savers to accumulate wealth, particularly if they are trying to do so in a relatively risk-free way.”
U.S. Treasury yields are at least 2 percentage points under what they would be otherwise because of the Fed’s low-rate policies and stimulus programs, said William Ford, former Atlanta Fed president who wrote a 2011 paper estimating the impact on savers of monetary easing. That reduces their income by at least $280 billion annually, his analysis shows.
“The costs of low interest rates are being ignored,” Ford said in an interview. “It is killing savers, elderly savers who are living on life savings that have been conservatively invested.”
Baby boomers started turning 65 in 2011, and every day for the next 16 years about 10,000 more will join them, according to the Pew Research Center in Washington. About 19.8 percent of the population will be 65 and older in 2030, compared with 12 percent in 2000, Census Bureau projections show.
Almost half of workers aren’t confident they will have enough money to retire, according to a survey released this month by the Employee Benefit Research Institute in Washington. Thirty-seven percent of non-retirees told a Gallup poll last year they don’t expect to quit their jobs until after age 65, more than double the 14 percent who gave that answer in 1995.
Americans face a “crisis,” said Alicia Munnell, director of the Center for Retirement Research at Boston College in Chestnut Hill, Massachusetts, and a former research director at the Boston Fed. “Five more years of low interest rates are going to make providing one’s self with an adequate retirement income extremely difficult.”
The financial crunch probably will reduce consumer-spending growth in the next decade and also could hurt career prospects for younger generations, said Steven Ricchiuto, chief economist of Mizuho Securities USA Inc. in New York.
“Simple, it is a drag,” he said. Either they cut spending to boost saving or “they will just be forced to work longer, making it harder for young people to get jobs or move up the ladder.”
Fed Chair Janet Yellen, who succeeded Ben S. Bernanke last month, was pressed on Feb. 11 about the impact of the central bank’s policies on older Americans. During her first semi-annual testimony to Congress, she echoed her predecessor’s philosophy that difficulty for savers is an unavoidable side effect of efforts to boost employment and growth.
“A low-interest rate environment is a tough one for retirees who are looking to earn income in safe investments like CDs or bank deposits,” Yellen said. “In a stronger economy, savers will be able to earn a higher return.”
The current national average rate on a five-year certificate of deposit is 0.8 percent, compared with 2.26 percent in 2009, according to Bankrate.com. The national average for money market accounts is 0.11 percent now, compared with 0.48 percent average five years ago.
U.S. Treasuries earned coupons of 7.5 percent two decades ago. Now investing in the U.S. government generates an average coupon of 2.5 percent, according to the Bank of America Merrill Lynch U.S. Treasury Index.
The Fed isn’t planning to raise rates soon. At last week’s meeting of the policy-setting Federal Open Market Committee, officials repeated their pledge that the rate for overnight loans among banks will stay low “for a considerable time” after their asset-purchase program ends.
They tapered their bond buying by $10 billion for a third time, to $55 billion a month, and predicted the benchmark rate will be 1 percent at the end of 2015 and 2.25 percent a year later, higher than previously forecast. The rate averaged about 5 percent in the year before the 18-month recession began in December 2007.
Some seniors are benefiting from the Fed’s policies, with mortgage rates the lowest in at least four decades.
Robert Fischl, 69, of Glenville, Georgia, cut his house payments by about $2,000 a year by refinancing in April 2013. His 15-year loan has a 2.3 percent annual interest rate, down from 4.63 percent on a 20-year loan. He also withdrew $5,000 during the process to help with a $15,000 sunroom expansion.
“I feel very lucky,” he said. “It is a really nice improvement to the house. We use it year-round.”
Rising home values and record stock prices also are helping some older Americans. The S&P/Case-Shiller index of house prices in 20 cities increased 13.2 percent in January from a year earlier, down slightly from the pace in November that was the biggest gain since February 2006. The Standard & Poor’s 500 Index jumped 30 percent last year.
“The best thing that’s happened for people looking at retirement is home prices went and up stock prices went up,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York. “U.S. households have never been more wealthy.”
Even so, men and women 65 and older are staying in the labor force longer: Their participation rate was 18.9 percent in February, near a 52-year high, while the overall rate held at 63 percent, near a 36-year low.
People are working longer not only because of financial need but also because of improved health and longevity, less physically demanding jobs, more women employees, declines in company-provided retiree health insurance and changes to Social Security, according to Boston College’s Munnell.
As the risk and responsibility of saving for retirement continues to shift to employees from employers, low interest rates could force some younger workers to hold onto their jobs longer than they’d planned.
The number of 401(k) plans grew to about 513,000 in 2011 from 17,000 in 1984, while active participants increased to 61 million from 7.5 million, according to Labor Department data. In that time, single-employer defined-benefit pension plans fell to about 43,800 from about 165,700.
While William Pagdon knows the Fed keeps rates low to boost employment, he doesn’t like being collateral damage: He now figures he’ll have to work a decade longer than he’d wanted.
Pagdon, a 51-year-old scientist who lives in Edison, New Jersey, with his wife and young son, has about 90 percent of his assets invested in “very safe, very low-yielding” bonds and the rest in the stock market, which he fears “will crumble.”
“My plan has been deferred about 10 years, so now I’m looking at 65 and not 55,” Pagdon says. “Interest rates have caused my savings to stagnate to close to useless.”
Loomis Sayles & Co. Vice Chairman Dan Fuss, 80, can see the impact of low rates on retirees at the grocery store near his home in Wellesley, Massachusetts.
“If you look at the average age of the people bagging the groceries, I want to help them push the cart out; and look at those riding the commuter train at rush hour, a lot of them are my age,” said Fuss, who managed the two best large U.S. bond funds during the past 10 years.
He says he’s still working because he loves it, yet empathizes with those who have no choice. “The savers are screaming.”