THE Fed's campaign to hold short-term interest rates near
zero is a loser for taxpayers. A rise in rates would also burden taxpayers, but
it would come with a benefit for those who save.
Low rates keep alive the banks that the government considers
too big to fail and reduce the cost of servicing the burgeoning federal debt.
Low rates also come at a cost, cutting income to older
Americans and to pension funds. This forces retirees to eat into principal, may
put more pressure on welfare programmes for the elderly and will probably
require the government to spend money to fulfil pension guarantees.
Raising interest rates shifts the costs and benefits,
increasing the risks that mismanaged banks will collapse and diverting more
taxpayers' money to service federal debt. On the other hand, higher interest
rates mean that savers, both individual and in pension funds, enjoy the fruits
of their prudence.
No matter which way interest rates go, taxpayers face
dangers. The question is where we want to take our losses. For my money, saving
the mismanaged mega-banks should be the last priority and savers the first.
Of course breaking up the big banks or letting them fail
also imposes costs and low interest rates benefit many Americans, though mostly
those with top credit scores, but policy involves choices and rescuing banks
from their own mistakes and subtly siphoning wealth from the prudent is
corrosive to the ethical and social fabric.
On the rise?
The federal government paid $454bn in interest on its debt
in 2011. That is the equivalent of all the individual income taxes paid last
year to the first three weeks of June.
If rates return to, say, 6.64%, the level they were in 2000,
one year's interest costs would equal the individual income taxes for all of
2011 plus the first few weeks of 2012.
Last week, rates took a step in that direction. The yield on
the 10-year bond, a benchmark for other interest rates, jumped to 3.3% from
2.57% in early November, raising the government's cost of borrowing in that
sale by one-fourth.
The average maturity of federal bills, notes and bonds is
just five years, with just 7% of debt financed for more than 10 years, the
equivalent of an adjustable rate mortgage with no upside limit.
Prudent people
The low interest rates since the financial crisis already
have imposed a cost on the prudent people who saved for the future, both those
who saved as individuals and those who put their money in pension funds.
Banks are paying less than 1% interest on savings, which
means rates are negative in real terms, forcing retirees to dig into their nest
eggs or cut spending.
Across the country, some fundraisers have told me of
benefactors who called to say that expected bequests would not be forthcoming
because they had been forced to dig into their savings.
Tax returns, too, show a disturbing, if logical, trend
toward less saving. The share of income from taxable interest fell from 3% in
1999 to 2.2% in 2009, the latest year for which tax return data are available.
More troubling is that the number of taxpayers grew by more
than 13 million over those years, while those reporting any taxable interest
fell from 67.2 million to 57.8 million. The share of taxpayers earning interest
plummeted from 52.9% to 44.1%.
Ravaged pension funds
At the same time low interest rates, on top of weak stock
prices, have ravaged pension funds.
Overall, state and local public employee plans lost 22.7% of
their value in 2009, the Census Bureau reported in October. Their assets fell
to $2.5 trillion from more than $3.2 trillion, while annual payments to
retirees and survivors rose 6.7% to $187bn.
In 2007 California's three main funds had from 96.6% to 102%
of the funds needed to pay benefits. As of last June 30, however, two of the
funds held less than two-thirds of the assets needed to pay benefits, while the
teachers' fund had just 69.5%.
Eventually, inadequate endowments will require taxpayers to
pay more so state and local governments can keep their pension promises.
The Pension Benefit Guaranty Corporation, which insures
corporate plans, owed $106.7bn to retirees as of September 30, but had only
$80.7bn of assets, a $26bn shortfall. Just four years earlier it reported a
surplus of nearly $10bn, or 87%.
The guaranty corporation also reported that its
"reasonably possible exposure" to plans that may fail increased by a
third last year to $227.2bn. Low interest rates are a key part of that risk.
Low interest rates are good for mismanaged banks and for
obscuring the cost of servicing the federal debt. But why do we elevate those
issues above the interests of society's prudent people whose personal and
pension fund endowments are being consumed prematurely due to government
policy?
- Reuters
* David Cay Johnston is a Reuters columnist. The opinions
expressed are his own.