A long winter for retirees as record low interest rates hurt savers
Ninety-five-year-olds who retired 30 years ago, back in 1990, would still be reminiscing today about getting around 15 per cent interest on a one-year term deposit at the bank.
Those were the days. You didn’t have to do a thing or take any risk, just plonk the money in the bank and sit back and watch enough money roll in to live on.
Sure, it lasted only a year and caused a recession, and the kids were a good chance to lose their jobs and move back home, but oh, what a time it was for retirees!
The recession also caused the bank term deposit rate to sink to around 5 per cent by 1994, but since then it has fluctuated between 5 and 8 per cent, which is not too bad. With a fairly decent sum, you could live on that and sleep at night knowing the money was safe.
After the GFC it looked grim, at first — the bank term deposit rate fell to about 3 per cent, but then the good old Reserve Bank decided that everything was fine and started putting up interest rates again. The cash rate went from 3 per cent in 2009 – a year after Lehman Brothers went bust — to 4.75 per cent in November 2010.
The term deposit rate shot back up from about 3 per cent — the same as the cash rate – to around 6 per cent, well above it, where it stayed for two contented years.
But alas, it was all a big mistake. The economy didn’t recover as expected, and wages and inflation were no-shows. Teeth were gnashed at the Reserve Bank as the inflation stayed below the target of 2 per cent, and down came the cash rate again, to 1.5 per cent by 2016, where it stayed for nearly three years.
And then, even before the pandemic, as inflation continued to flag, down it went to 0.75 per cent.
And then finally, in the year of COVID-19, the coup de grace for retirees: the official cash rate was cut to 0.1 per cent by the Reserve Bank — and they have said it will stay there until 2024, if you don’t mind!
Naturally, as intended, the bank term deposit rate followed suit. Now the big banks will give you roughly 0.35 per cent to lock your money up for 12 months; the 15 per cent of 30 years ago seems like a millennium past.
And to rub salt into the wound, many of the banks give a special 12-month deposit rate of 3 per cent — to 18-29 year-olds!
Retirees are collateral damage
Never have the opening words of A Tale of Two Cites seemed more appropriate: “It was the best of times, it was the worst of times … it was the spring of hope, it was the winter of despair…”
For young first home buyers and families burdened by huge mortgages it is the best of times, the spring of hope, and they are putting that hope to work by pushing up house prices to record levels.
And why not? A three-year fixed-rate mortgage costs less than 2 per cent interest. The home buying power of most people has doubled in a decade, and with the supply of housing tight, they are using it to get the place they have always wanted.
For retirees, on the other hand, it is the winter of despair. In 30 years from now, the sprightly 95-year-olds will be reminiscing about 2021 with a shudder as they chat over a beer after a game of bowls.
“Remember when we could only get a third of 1 per cent interest from the bank? I had to buy bank shares instead and now look at me – I can’t even afford proper whites.”
It all comes down to risk and return. To get wages and inflation up, the Reserve Bank is doing two things: first, it’s encouraging borrowers to borrow more or to spend what they save on interest, and the second thing is forcing savers to take more risk.
Savers are mostly retirees. Why does the RBA want them to take more risk? Because theoretically that means more productive investments: in order to provide 5 per cent interest or more, a business has to put that money to work.
That’s the theory at least. I think retirees are mostly just collateral damage in the war against low inflation. They happen to be in the way of the RBA’s efforts to get borrowers to spend and/or borrow more, the idea being that there are fewer retirees being impoverished and spending less than there are borrowers spending more.
Again, that’s the theory, but the truth is it’s not working. The RBA has cut the cash rate from 4.75 per cent to 0.1 per cent since 2011 and after a brief spike to 3 per cent in 2014, the inflation rate has done nothing but go down.
RBA Governor Philip Lowe says interest rates are likely to stay where they are until 2024; it looks like being a long winter.
Alan Kohler is the ABC’s finance presenter. He also writes columns for news website The New Daily, which is financially backed by industry super funds and he is also the editor in chief for online financial website, InvestSMART.
The Future of Retirement, a four-part special presented by Alan Kohler, continues tonight on 7.30. Watch it on ABC TV or iview.