The Perils of Savers

One of the hardest lessons of the Great Recession has been accepting the fact that one need not have done anything imprudent, excessive or unlawful to find oneself a victim of it anyway. If you did not let your credit card debt mount precariously, or take out a mortgage beyond your means or connive to urge others to do so, you likely have still seen the returns on your stock and bonds plummet, your salary or raise be frozen, cut back, or worse. Your home is not worth what it was just a few years ago. And you can’t find a decent rate of return on your investments, if you are lucky enough to have any. In this respect, the man-made recession (which is what it is) resembles a natural disaster: When a flood or a hurricane hits, it wreaks havoc on whoever is at hand.

Without a doubt, the U.S. government has a tough job to do in trying to fine tune the domestic economy, which is not only complex and enormous, but also fluctuates, depending on what other nations and governments do. And it falls to our government (under “to promote the general welfare”) to figure out how to stabilize the economy and stimulate growth, while also assisting those hardest hit by the recession. That assistance includes even those who acted irresponsibly by engaging in risky spending, borrowing or lending. Of course, such government assistance incurs the wrath of other taxpayers who did not act irresponsibly and who do not want to pay for the foolishness of others. Which is why the idea of a “bailout” goes against the grain of so many Americans brought up to believe in that phantom “rugged individualism.” In fact, we are all connected in the economy even if we would prefer not to be and would prefer to think of ourselves as individualists, rugged or otherwise.

Today’s news highlights one more group hard hit by the recession, whose plight should be seriously taken up by government and civic leaders as they make policy—persons who live on a fixed income, especially those who had responsibly planned to live through retirement subsidized by the “earnings” of their life savings. The “earnings” rates are now less than 1 percent, and on “safe” government treasury bonds are near zero. This is the sad situation of some of the most self-reliant citizens among us, most of whom began living on reduced incomes before the recession.

In trying to stabilize the economy by holding interest rates down, the Fed, has inadvertently tightened the belts and circumscribed the lives of savers—mostly seniors with few options left to raise cash or increase their wealth. How long will the interest rates remain weak? No one knows.

Still, habits of saving, thrift, and living within one’s means add stability and economic security, up to a point.

Right now, workers enjoy incentives to save, the primary one being the tax-deferred savings programs, known as 401k’s or 403b’s. Workers can sock away part of each paycheck, tax free, although they will have to pay taxes on the money later when they withdraw the principal and earnings in retirement. The presumption is that by then, their tax rate and/or their taxable income will be lower. Which means, they effectively realize the difference. With interest currently so low on savings, workers who put every dime they can into such programs might do very well if the difference in tax consequences is greater than the return on most other investments.

Those without a paycheck, however, have no such opportunity. (For them, fixed-income investments have seldom looked so good.) Such people, mostly seniors, are on their own. As the economy sputters and the flood waters recede, they watch their savings dry up.