Janet Yellen Can’t Help Retirees

Interest rate increases won’t do much for the poorest Americans’ retirement savings.

Illustrator: Charlotte Pollet

For millions of aging Americans, the dream of a secure retirement has proved elusive. But if you think interest rate hikes from the Federal Reserve will provide relief, you’re wrong.

Many graying Americans, particularly the poorest, have saved so little and borrowed so much that raising rates will have no real positive impact and may even hurt. The result could be a still-wider gap between the richest and neediest retirees.

On average, the poorest 20 percent of Americans older than 64 earned just $38 annually in interest, about 0.2 percent of their income, according to a review by Bloomberg in conjunction with the Boston College Center for Retirement Research. The same group is also carrying more credit card debt—$2,403 on average—than any of their richer fellow seniors. That burden will grow heavier as rates rise.

“We all can think of some very conservative, cautious people who retired to Florida and put all their savings in CDs,” says Gary Burtless, a senior fellow in economic studies at the Brookings Institution. “But if you think that’s the norm, I’ve got a bridge in Brooklyn I’d like to sell you.”

Low rates have roused the ire of some GOP lawmakers for almost a decade. This camp, led by Representative Jeb Hensarling of Texas, says easy money could spark inflation and encourage the government to run higher deficits. And it says low rates punish senior citizens who rely on income from savings. “A decade of artificial monetary support put retirees at risk,” Kentucky Representative Andy Barr said in June.

Recent Fed moves to lift the benchmark rate to 1.1 percent, and projections of reaching 2.7 percent by the end of 2019, haven’t placated critics, who want Janet Yellen replaced by a more hawkish chair when her term expires in February. But the new analysis makes clear that rate hikes won’t solve the crisis. Using the Fed’s consumer survey data for 2013 (the most recent available), Bloomberg and the Center for Retirement Research focused on households headed by people 65 or older, excluding those that reported abnormally high or low income for that year, and separated them into quintiles by net worth.

Interest incomes are so low that a substantial rate increase wouldn’t make a meaningful difference for a huge portion of seniors, the analysis found. “Interest-paying assets just aren’t a big part of the portfolios of most Americans, particularly those in the lower and middle parts of the income distribution, the ones who have the most concern about their retirement security,” says Karen Dynan, a Harvard economics professor.

Higher rates could also push up payments on most credit card debt and drive down the value of income-producing investments. Stephen Utkus, head of investor research at Vanguard Group Inc., estimated the net impact of a hypothetical 2 percentage-point jump in market rates. For the exercise, he assumed 401(k) and IRA savings were invested evenly in stocks and bonds and made other assumptions about the composition of the average bond portfolio. Total wealth for all groups fell, his analysis showed. The two richest groups each saw wealth dip by 2.4 percent. “People will have higher interest earnings,” he says. “On the other hand, as rates go up they may take it on the chin on the capital side.”

In Utkus’s estimates—not meant to be precise predictions, he says—total income for the average household in the lowest quintile actually fell, by 0.4 percent, driven largely by the higher interest on debt. For the other quintiles, incomes rose by 0.6 percent, 2.7 percent, 6 percent, and 6.5 percent, respectively.

For richer groups, those gains make it easier to play it safer with investments by moving money into bonds, for example. But the affluent are already ahead: They’ve seen stocks and home values soar, thanks to low rates. U.S. stocks have returned 15 percent annually since rates dropped to near zero in December 2008.

Two more factors disturb the siren song of higher rates: inflation and taxes. Historically, higher interest rates come when inflation is also higher, which eats away at the real value of all returns.

“Those higher interest rate numbers look great, but often the income was only doing enough to reimburse you for inflation, and you had to pay income taxes on the full interest payment,” Brookings’s Burtless says. “The good old days weren’t all that wonderful.”

    BOTTOM LINE - For retirees in the lower and middle wealth distribution, interest-paying assets won’t provide meaningful relief when rates rise.
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