Uncle Sam has been waging an undeclared war on seniors for the past decade. With interest rates at historic lows and with the Federal Reserve (“the Fed”) poised to keep them artificially low for years, senior citizens will be left standing alone at the Great American Debt Dance.
To understand the miserable position seniors are in, some economic history is in order. According to the Census Bureau, from 1998 through 2005 the median senior citizen’s net worth grew an average of 11 percent per year. Of course, home values were rising over this period, but if we subtract the growth in home prices, the median senior’s net worth still grew by an average of 8 percent annually.
That party ended in 2005. From 2005 to 2010 (the last year for which data is available) the median senior’s net worth declined an average of 2.8 percent per year—a particularly troubling situation for those who are retired and rely on their accumulated savings to live.
The decline in home values played a part, but only a part. From 2005 on, seniors saw their accumulation of wealth slow by between 12 percent and 14 percent annually, depending on whether one counts changes in home values. Why have seniors’ net worths taken such a staggering hit? The answer is shockingly simple: By holding interest rates at or near zero for so long, the Fed has been forcing seniors to switch to riskier investments like stocks and mutual funds just to maintain their standards of living.
This switch has ultimately caused many seniors’ traditional sources of investment income to dry up. Because they don’t have many years in front of them to make up investment losses, seniors want to rely on safe investments like savings accounts, certificates of deposit (CDs), and U.S. savings bonds, all of which pay lower returns than more risky investments, like stocks and mutual funds, which reward investors for incurring risk.
Read More at forbes.com . By Antony Davies and James Harrigan.