Yesterday's Boston Globe featured the story, "Banks' record-low interest rates frustrate nation's savers." The article is one of a number of news items recently highlighting retirees and savers frustrations with the Federal Reserve's zero-rate policy. The revolt is gaining so much steam that Federal Reserve Board Chairman Ben Bernanke took the unpredicted step of defending his punishing rate policy in a speech in Indiana Monday.
The Globe story says, "Neil Silverman, a Framingham engineer, diligently saved for decades, accumulating a nest egg worth more than $1 million. But when Silverman reached retirement age, he encountered an unexpected hurdle: interest rates so low that his savings are generating little income. Even $1 million in the bank at 1 percent interest yields just $10,000 a year -- not much to live on. So at 69, Silverman says, "I'm the proverbial retiree next door and I can't afford to retire.""
It adds, "Just when you thought rates on popular savings vehicles couldn't possibly go lower, they do. The average interest on a savings account is 0.08 percent a year, down one-third from last year, according to the Federal Deposit Insurance Corp. That means $10,000 would generate just $8 a year in interest."
The Globe explains, "Ultra-low rates are a by-product of the Federal Reserve's efforts to revive the economy by making it cheaper for Americans to borrow money for everything from purchasing a home to investing in a new business. But what has been good for borrowers has been bad for savers, especially seniors who depend on interest from savings to supplement their income."
Bernanke defended his increasingly unpopular rate policy in a Q&A yesterday. One question he addressed was "How Does the Fed's Monetary Policy Affect Savers and Investors?" He commented, "One concern in the here and now is about the effect of low interest rates on savers and investors. My colleagues and I know that people who rely on investments that pay a fixed interest rate, such as certificates of deposit, are receiving very low returns, a situation that has involved significant hardship for some. However, I would encourage you to remember that the current low levels of interest rates, while in the first instance a reflection of the Federal Reserve's monetary policy, are in a larger sense the result of the recent financial crisis, the worst shock to this nation's financial system since the 1930s."
He added, "A second observation is that savers often wear many economic hats. Many savers are also homeowners; indeed, a family's home may be its most important financial asset. Many savers are working, or would like to be. Some savers own businesses, and--through pension funds and 401(k) accounts--they often own stocks and other assets. The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth, and led to sharp declines in the values of many homes and businesses. What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy.... Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates."
In other news, the Investment Company Institute released a study entitled, "Retirement Assets Total $18.5 Trillion in Second Quarter 2012" last week. It says, "Total U.S. retirement assets were $18.5 trillion as of June 30, 2012, down 2.0 percent from $18.9 trillion recorded on March 31, 2012. The decrease in retirement assets was driven by the drop in corporate equity values -- for example, the S&P 500 Index fell by 2.8 percent in the second quarter. Retirement savings accounted for 36 percent of all household financial assets in the United States at the end of the second quarter of 2012."
The study shows money market mutual funds accounting for just $392 billion, or 6.5%, of the $6.061 trillion in mutual fund retirement assets, and just over 2% of the entire $18.5 trillion marketplace. Given money funds asset totals of approximately $2.568 trillion, this means retirement-related assets account for approximately 15.3% of all money fund assets. IRAs showed the highest level of usage among types of accounts, with $213 billion in money market funds representing 9.1% of the overall $2.334 trillion in IRA fund assets. Money funds accounted for just $99 billion (5.0%) of the $1.996 trillion in 401(k) plan mutual fund assets.