By Dean Baker and David Rosnick

Over the last seven years there has been a steady drumbeat of complaints from people who are upset by the Fed’s zero interest rate policy. We first heard that it was going to lead to hyperinflation. Then we were told that low interest rates would fuel asset bubbles. More recently a rate hike has become a matter of the Fed’s credibility.

One of the most persistent complaints is that the zero interest rate policy is unfair to small savers. The argument is that we have all these elderly people who depend on the income from their savings who are being destroyed by getting near zero interest on their CDs and money market accounts.

There are two problems with this story. The first one is a logical problem. Interest rates are low because the economy is extremely weak. In the simple textbook story (very simple), the interest rate is supposed to equate the supply and demand for savings. Ever since the recession began we have had an enormous excess supply of savings. This means that the interest rate should be lower than it actually is. However, interest rates don’t fall further because they will not go below zero, or at least not much below zero. People are not willing to pay banks to borrow their money.

Given the market outcome pushing interest rates to zero, those who want the 2–3 percent short-term interest rates of pre-recession years effectively want the government to pay them interest rates that are above the market clearing rate. That’s fine as a demand from a self-interested group — I’d like the government to pay me twice what my house is worth — but it’s not one that deserves much credence in policy debates. Most of us probably think it’s more important to use the Fed’s monetary policy to get people employed than to subsidize the interest received by savers.

The other problem is that the story of small saver suffering because of low interest rates doesn’t fit the data. There just are not very many people with substantial amount of savings in CDs, money market, saving accounts, or other short-term assets who don’t also have large amounts of money in stocks and bonds. Anyone who has large sums in stocks and bonds has done very well in the last five years, as both markets have soared, so if they aren’t earning much interest on their savings accounts it is difficult to feel too sorry for them.

To get an idea of how many older people might be hurt by low interest rates and to what extent; we analyzed data from the Federal Reserve Board’s 2013 Survey of Consumer Finance (SCF). The issue is how many people have substantial holdings in certificates of deposits, money market accounts, savings accounts, and other short-term holdings, who don’t also have substantial assets in stocks, bonds, or mutual funds.

The first cut is for people who have less than $10k in stocks, bonds, or other longer term assets. Just under half (14.3 million) of the 28.9 million older households in the SCF fall into this category. Of this group, under one-third (4.7 million households) had at least $6k more in short-term assets than in stocks bonds and other longer term assets. One and a half million had a gap between short-term and long-term assets of at least $40k, and 570,000 had a gap of at least $100k.

These people can be thought of as losers from the Fed's zero interest rate policy. To get an idea of how much they lose assume, very generously, that the short-term interest rate on deposits would be 3.0 percentage points higher with a different Fed policy. In this case, the 4.7 million households with a gap of at least $6k between their short term holdings and long-term holdings are losing at least $180 a year. The one and a half million households with a gap of $40,000 or more would be losing over $1,200 a year as a result of the Fed's policy. Households with a gap of more than $100,000 between holding in short-term and longer term assets would be losing more than $3,000 a year.

If we move up to households with between $10,000 and $50,000 in stock and other long-term assets, 26.1 percent, or 865,000 households have a gap of at least $6,000 between thier short-term deposits and their long-term assets. Only 345,000 households have more than $40,000 just 206,000 have a gap of more than $100,000 between their short-term assets and longer term assets.

In the range of households with $50,000 to $100,000 in stock and other long-term holdings, 18.5 percent, or 401,000 households have a gap of more than $6,000, but only 191,000 have a gap between short-term deposits and long-term holdings of more than $40,000. For those with longer term assets of more than $100k, only 283,000 had a gap of at least $40,000 between their short-term holding and longer term holdings.

The overall picture is shown in the table below.

Long-Term HH with at least   HH with at least   HH with at least
Holdings $6k gap between   $40k gap between   $100k gap between
  short and long   short and long   short and long
  holdings   holdings   holdings
  (thousands of households)      
Under $10 k 4,708   1,503   572
$10k-$50k 865   345   206
$50k-100k 401   191   91
Over $100k 365   283   210

Source: Survey of Consumer Finance and authors' calculations.

While 6.3 million households have a gap in their short-term holding and longer term holdings of at least $6,000, this is an extremely low threshold. Even assuming a counterfactual with a short-term interest rates that are 3 percentage points higher, this implies a loss of just $180 a year. It is reasonable to use the $40,000 threshold to identify major losers from the policy, implying a loss of $1,200 a year in the 3 percentage point difference counterfactual. There are roughly 2.3 million older households, or just under 8.0 percent of older households, in this category. From this group, 1,080,000 households (3.7 percent) have a gap of at least $100,000, implying they stand to lose at least $3,000 a year under the assumption of a 3 percentage point difference in interest rates.

How should we think about the losers in this story? First, they are a small minority of the senior population, although still a substantial number of people. These losses are not trivial if we assume someone is otherwise surviving on Social Security benefits that average a bit less than $16,000 a year per retiree. The $1,200 lost by someone with $40,000 in savings would be equal to 7.5 percent of a single person's benefit. (Many of these households will be couples that get two benefits.) There have been major political battles over changes to the cost-of-living adjustment formula that would reduce benefits by around 0.3 percent annually. Even after twenty years this would amount to a cut of less than 6.0 percent.

On the other hand, the reason for the drop in interest rates is the collapse of the economy in 2008 and the weak recovery since then. Seniors who complain about low interest rates are effectively asking the government to protect them from the impact of this collapse. In this respect, it is worth noting that they would have been able to fully insulate themselves from this risk simply by holding long-term government bonds. If they had held their money in long-term bonds in 2007, rather than short-term deposits, they could still be earning close to 5.0 percent interest, in addition to having a large capital gain on the bond itself.

By comparison, if the Fed had maintained a policy where interest rates were 3 percentage points higher than they are today we would almost certainly be seeing several million more unemployed workers. In addition, as a result of weaker bargaining power, the wages of tens of millions of workers would almost certainly be several percentage points lower. Also, as a direct effect of higher interest rates, tens of millions of homeowners would be paying 2–3 percentage points higher interest on their mortgages. For someone with a $200,000 mortgage this would amount to between $4,000 and $6,000 in higher interest payments each year. This additional interest burden, coupled with the negative effect of higher interest rates on house prices would have meant millions more people losing their homes.

Taking into account the overall impact on the economy it is hard not to see the low interest rate policy as a huge gainer for low and middle income people on the whole, even if there are some people in this category who end up as losers. This raises a more general point. We really don't have any policies that can benefit large numbers of people without also leading to some losses among low and middle income people.

For example, most folks would think modernizing the infrastructure so that people don't have to waste so much time and gas in traffic is a good idea, especially since it directly employs people. But if we build a new bridge then we will be diverting people from the old bridge, hurting the businesses along the route and the people who work there. Suppose we have a jobs program in a low-income area. That's good news for the people who get the jobs, but the increased income flowing into the area will likely put upward pressure on rents, hurting retirees who will not directly benefit from the jobs program. Even a program promoting healthier nutrition will result in fewer jobs for caregivers to the sick.

These examples may sound almost silly in terms of the disproportionate gains to the winners versus the costs to the losers, but the point is that there are losers even in these cases. We would not think of abandoning these policies because of the losers. In the same vein, the benefits to the winners from the Fed's low interest rate policy are hugely out of proportion to the losses to savers. These losses are a downside, but hardly one that would warrant reconsidering the policy.