Savers Hurt By Interest Rate Cuts Graphic
Dec. 25, 1991
NEW YORK (AP) _ Lower interest rates have made home buyers gleeful, but low yields on certificates of deposit and other savings are bringing slim returns for millions of Americans dependent on interest income.
As the government tries to jump-start the economy by making money cheaper, yields on simple savings accounts have tumbled. A one-year certificate of deposit that yielded 7.95 percent early last year is returning only 4.54 percent to investors these days, according to figures from Bank Rate Monitor, a newsletter based in North Palm Beach, Fla.
The average Super NOW checking account pays a mere 3.71 percent annually as interest rates tumble to levels not seen in decades.
''People who derive a large percent of their income from CDs or bonds or money market funds are hurting,'' said David McLaughlin, a partner with the financial planning firm Chase Investment Consultants in Charlottesville, Va.
Often, such people are retired, living on savings and pension checks. A spokesman for the American Association of Retired Persons in Washington said more members are calling wondering whether they should shift their funds out of the conventional, short-term savings instruments they are accustomed to.
Experts say that unless the money is needed for day-to-day living, investors should consider longer-term securities like 10-year government bonds, which have higher yields, or opt for greater risk with stocks or stock mutual funds.
On the whole, Americans receive more interest income than they pay in interest fees. For the seasonally adjusted annual rate as of November, Americans had received $714 billion in interest income while they paid out $106 billion in interest expenses associated with loans.
''So what we receive in interest income is seven times greater than what we pay,'' Mitchell Held, chief financial economist at Smith Barney, Harris Upham & Co., said. But overall, lower interest rates ''actually help the economy because they allow companies to spend money'' and keep business growing, and that eventually filters down to employees - the consumers.
About 25 percent of retired Americans live near the poverty line and therefore are unaffected by interest rate changes. Most others have very stable expenses. ''They probably already have bought that car, their house is almost paid for, they already have that TV and aren't about to go out and buy a new suit every couple of months,'' McLaughlin said.
Aside from necessities like food and housing, and gifts and occasional travel, their spending patterns are not likely to be altered that much despite lower interest rates, experts say.
Craig Hoogstra, director of the AARP's financial services division, offered this hypothetical: Someone with $10,000 to $50,000 in the bank is losing only between $1 and $4 each day after taxes if the yield on a CD falls from 8 percent 4 percent.
While ''it means all the money in the world to someone who needs it for necessities, someone who has $50,000 in the bank is more likely to be worried about whether they're making the best use of assets it's taken them a lifetime to work up to,'' Hoogstra said.
Also, prices aren't rising nearly as fast as when interest rates were higher.
In the first 11 months of this year, consumer prices rose at an annual rate of 2.9 percent. In the same period last year, when one-year certificates of deposit were yielding 3.41 percentage points more, the annual inflation rate was about 2.5 percentage points higher.
While interest rates have fallen slightly faster than inflation, much of the purchasing power of the money that people earn on their investments has been preserved.
McLaughlin sees the whole interest rate scenario as a redistribution of wealth. While some people are earning less on their investments, others are able to purchase homes for the first time.