Oldster Tax

[mickeyd]

(Again Bogleheads locked me out on this item, hope it fits here.)

Not sure how all of this will affect my finances, but this surely looks like a tax, smells like a tax, sounds like a tax. Hope I will not step in it!

Now the down side of saving for the future begins to show it's ugly head.

So here’s a tough question: How much would the standard of living of retirees decline if current conditions persisted into the distant future?
​

Is this how it would affect every retiree? No. Retirees with smaller nest eggs would be less affected because more of their income comes from Social Security and less from investments. Retirees with more in savings, however, would be more affected because a larger proportion of their income comes from savings.

How will lower returns affect you?

It all depends on your income, marital status, whether you own or rent, whether you have a mortgage, etc.
​

http://assetbuilder.com/blogs/scott_bur ... t-you.aspx

 

[REWahoo]

(Again Bogleheads locked me out on this item, hope it fits here.)

I think they are trying to tell you something...

 

[ProGolferWannabe]

(Again Bogleheads locked me out on this item, hope it fits here.)

Not sure how all of this will affect my finances, but this surely looks like a tax, smells like a tax, sounds like a tax. Hope I will not step in it!

Now the down side of saving for the future begins to show it's ugly head.

​

http://assetbuilder.com/blogs/scott_bur ... t-you.aspx

I have actually been very surprised at how little "uproar" there has been (at least as reported in the media, or addressed by our political class) by those who are dependent upon higher interest rates to generate income to fund their golden years. The policy of driving interest rates down is basically redistributing income from savers in favor of debtors. And I just paid off my mortgage a year ago---how dumb can I be?

 

[MichaelB]

The link is to a Scott Burns article about low returns. The title is eye-catching but a bit sensational.

 

[M Paquette]

I have actually been very surprised at how little "uproar" there has been (at least as reported in the media, or addressed by our political class) by those who are dependent upon higher interest rates to generate income to fund their golden years. The policy of driving interest rates down is basically redistributing income from savers in favor of debtors. And I just paid off my mortgage a year ago---how dumb can I be?

I'm OK with it. See, I recall this period where 10 year Treasuries and all the things that key off them were paying a whopping 10% every year.

The gotcha was that the inflation rate was considerably higher. 10% doesn't look so good against 15% inflation.

Be careful what you wish for. You just might get it...

 

[Nords]

I think the difference between "tax" and "different economic conditions" is that this time federal govt isn't levying a new method to collect your money and then spend it on something else.

Instead the federal govt is keeping interest rates as low as possible so that they don't have to give Treasury owners their money back.

(Again Bogleheads locked me out on this item, hope it fits here.)

I think they are trying to tell you something...

... that they need more moderators, or less moderation?

 

[ziggy29]

Instead the federal govt is keeping interest rates as low as possible so that they don't have to give Treasury owners their money back.

Which includes Social Security. I wonder how much the Fed is taking into account how much the ongoing War on Savers is going to deplete SS much faster because it's earning almost no interest...

 

[Helen]

Which includes Social Security. I wonder how much the Fed is taking into account how much the ongoing War on Savers is going to deplete SS much faster because it's earning almost no interest...

But there is no surplus of SS to be growing from interest earned.

 

[Independent]

I'll agree that pushing down interest rates helps borrowers and hurts savers. I'm not sure how much of this is the Fed and how much is the market.

The particular rate that the Fed can control is the very short term. Few of us think that our retirement savings should be in money market accounts.
I know they have been trying to hold down longer rates ("twist"), but I don't know how much impact they've had. Fill in the blank: If the Fed were not trying to keep 10 year rates down, the 10 year Treasury yield would be _____ .

Re Burns' calculation, I see that he uses 3% inflation with a nominal 1% bond yield. I think that longer TIPS are still priced to yield something around inflation, certainly not a negative 2%, so it seems he's being rather pessimistic on that assumption.

 

[Animorph]

But there is no surplus of SS to be growing from interest earned.

SS does receive interest on the government bonds it holds. It's all part of the SS laws. And it has quite a lot of those bonds ($2.7 trillion).

http://www.ssa.gov/oact/progdata/fundFAQ.html#n2


"The rate of interest on special issues is determined by a formula enacted in 1960. The rate is determined at the end of each month and applies to new investments in the following month.
The numeric average of the 12 monthly interest rates for 2011 was 2.417 percent. The annual effective interest rate (the average rate of return on all investments over a one-year period) for the OASI and DI Trust Funds, combined, was 4.401 percent in 2011. This higher effective rate resulted because the funds hold special-issue bonds acquired in past years when interest rates were higher."

Not too bad. And the bonds are redeemable at any time at face value.

and here's the summary from the 2012 SS report:

http://www.ssa.gov/oact/TR/2012/tr2012.pdf

"

At the end of 2011, the OASDI program was providing benefits to about 55
million people: 38 million retired workers and dependents of retired workers,
6 million survivors of deceased workers, and 11 million disabled workers
and dependents of disabled workers. During the year, an estimated 158 million
people had earnings covered by Social Security and paid payroll taxes.
Total expenditures in 2011 were $736 billion. Total income was $805 billion,
which consisted of $691 billion in non-interest income and $114 billion in
interest earnings. Assets held in special issue U.S. Treasury securities grew​

to $2.7 trillion."

 

[clifp]

The link is to a Scott Burns article about low returns. The title is eye-catching but a bit sensational.

To be honest I think it understates the problem and we see it on the forum all the time. Tax is really too mild a term, I prefer "The Feds war on savers", and sadly it is one of the few wars (e.g. drugs obesity) that I think Uncle Sam is winning hands down.

I reluctantly have gone along with Fed desire for me to put my assets in more speculative things, stocks, junk bonds, real estate, tech starts ups.
But I have a great deal of sympathy for the many folks on the forum who have saved all their live with expectation of a say 5% interest rate which slightly exceeds inflation of 2-3%. The are now forced to work longer, dip into their principal, and/or accept a much lower income stream in retirement.

All this to bail out both the people who borrowed too much and the banks who foolishly lent them money.

To add insult to injury the Fed's balance sheet is now loaded to the gills with low yielding Treasury bond which I fear we the savers will eventually pay for again via inflation or some other mechanism.

 

[MooreBonds]

To be honest I think it understates the problem and we see it on the forum all the time. Tax is really too mild a term, I prefer "The Feds war on savers", and sadly it is one of the few wars (e.g. drugs obesity) that I think Uncle Sam is winning hands down.

I reluctantly have gone along with Fed desire for me to put my assets in more speculative things, stocks, junk bonds, real estate, tech starts ups.
But I have a great deal of sympathy for the many folks on the forum who have saved all their live with expectation of a say 5% interest rate which slightly exceeds inflation of 2-3%. The are now forced to work longer, dip into their principal, and/or accept a much lower income stream in retirement.

All this to bail out both the people who borrowed too much and the banks who foolishly lent them money.

But do you really think it's an outright planned goal to attack the ability of savers to live off of their assets?

This is not a communist society. If people truly didn't want to accept a 0.1% APY on a 1 year CD....then they would instead put the money in something else. The CIA isn't holding a gun to their head and telling them "sign on the dotted line....or else!".

If people didn't accept such paltry yields, then they wouldn't help create the demand that helps in part to shape the current yield curve. If people weren't accepting these crazy low interest rates, then the Fed wouldn't still have 2x and 3x bid coverage on each and every Treasury auction - the coverage would be less than 1x.

Because there is such a global demand for ANY term deposit, it helps drive down rates low. True, part of this demand is artificially created by the Fed - but the Fed can only do so much. Is their % involvement enough to create the demand imbalance to severely suppress interest rates? (just like one OPEC producer shutting down could be a small drop in oil output, but enough to move the equilibrium such that oil spikes $20/barrel) Partly yes, and partly no, but I wouldn't guess that they have as much effect as we might give them credit for.

 

[LARS]

Moorebonds-

What you are forgetting in your analysis is that foreign central banks (think Japan and China) are significant buyers of treasuries and their purchases are made for reasons other than rates (ie-currency manipulation).

 

[M Paquette]

Moorebonds-

What you are forgetting in your analysis is that foreign central banks (think Japan and China) are significant buyers of treasuries and their purchases are made for reasons other than rates (ie-currency manipulation).

Well, and the large amount of US currency that they receive in exchange for the products that they supply to the US.

The economist Milton Freidman noted that the trade deficit exists as it is matched by investment coming in to the United States; purely by the definition of the balance of payments, any current account deficit that exists is matched by an inflow of foreign investment.

 

[Helen]

SS does receive interest on the government bonds it holds. It's all part of the SS laws. And it has quite a lot of those bonds ($2.7 trillion).

Thank you so much for the information. I did not know that.

This is an interesting thread.

 

[donheff]

I don't believe there is a war on savers, just collateral damage. If the Fed wasn't practicing QE maybe we would be better off but maybe our equities would be halved instead and unemployment would be 15%. The bottom line is that we (Government, banks, citizen buyers) blundered our way into a depression and things don't look rosy on the way out. At least we ERs are not worried about being laid off.

 

[Mulligan]

I certainly don't view it as a tax, but it has lead to unfortunate results for many older traditional CD investors. It does potentially set them up for failure in chasing yield in bond products they do not understand, or getting whacked in another market swoon. It certainly isn't a right of savers to earn their
6% CDs, as interest rates have been low in decades gone by in the last century. But in more recent times it has been pretty easy to find CD rates higher than inflation rate. And even if it wasn't, a typical older investor would be better off with 5% inflation and 5% CDs, than 1% inflation and 1% CDs, I believe. As we have suggested in an earlier thread inflation rates can be controlled by retirees and be kept below official government measurements.

 

[Brat]

This is an interesting discussion because asset allocation theory would have our IRAs with around 70% in bonds. I could just buy Wellesley and call it a day but I expect an eventual significant drop in bond values with an increase in interest rates in the intermediate term so am leery funds with bonds. I am wondering about alternatives such as original issue bonds, CDs and/or dividend paying stocks.

My research of analysis of dividend ETFs/funds wasn't encouraging. I looked at the yield of S&P 500 index funds and noticed that it is heavy in dividend paying stocks. Both bond funds and stock funds have initial investment risk but if interest rates go up there is no prospect of a bond's value increasing while a stock may recover in time.

Original issue bonds are expensive to sell so I would only buy those to be held to maturity. With interest rates so low CDs are almost more attractive for the intermediate term because at worst you loose your interest and may be nipped for a small fee if you wish to redeem prematurely.

I would appreciate comments by others.

 

[Lsbcal]

I have actually been very surprised at how little "uproar" there has been (at least as reported in the media, or addressed by our political class) by those who are dependent upon higher interest rates to generate income to fund their golden years. The policy of driving interest rates down is basically redistributing income from savers in favor of debtors. And I just paid off my mortgage a year ago---how dumb can I be?

One reason for the lack of uproar -- with rates coming down bond returns got goosed. For example, the 1 year return for intermediate Treasuries is 8.6%.

It is when rates truly flatten out and then start up that the "savers" will express their unhappiness.

 

[GrayHare]

Because there is such a global demand for ANY term deposit, it helps drive down rates low. True, part of this demand is artificially created by the Fed - but the Fed can only do so much. Is their % involvement enough to create the demand imbalance to severely suppress interest rates? (just like one OPEC producer shutting down could be a small drop in oil output, but enough to move the equilibrium such that oil spikes $20/barrel) Partly yes, and partly no, but I wouldn't guess that they have as much effect as we might give them credit for.

Per the following link, during the past 20 years the Fed has been the primary driver of interest rates, and in turn stock prices:

"The Federal Reserve announces what it's going to do to interest rates eight times a year at Federal Open Market Committee meetings. These are scheduled in advanced and well-publicized, so investors know exactly when the goods are coming.

"Since 1994 (when the Fed started publicizing its moves), the S&P 500 has risen from 450 to 1300. But remove the 24 hours just prior to FOMC announcements, and returns fall to almost nothing."

http://www.fool.com/investing/general/2012/07/13/whos-really-driving-the-stock-market-.aspx

 

[M Paquette]

Per the following link, during the past 20 years the Fed has been the primary driver of interest rates, and in turn stock prices:

"The Federal Reserve announces what it's going to do to interest rates eight times a year at Federal Open Market Committee meetings. These are scheduled in advanced and well-publicized, so investors know exactly when the goods are coming.

"Since 1994 (when the Fed started publicizing its moves), the S&P 500 has risen from 450 to 1300. But remove the 24 hours just prior to FOMC announcements, and returns fall to almost nothing."

http://www.fool.com/investing/general/2012/07/13/whos-really-driving-the-stock-market-.aspx

This is less significant than it appears. Try removing any eight days of returns each year and re-plot the charts, and you'll get a range of results that resemble the Mötley Fool writers charts. Some will have a worse result, and some will have a better result.

Data here in Excel format: http://www.econ.yale.edu/~shiller/
Hack as needed...

In other news, correlation does not imply cause...

 

[GrayHare]

This is less significant than it appears. Try removing any eight days of returns each year and re-plot the charts, and you'll get a range of results that resemble the Mötley Fool writers charts. Some will have a worse result, and some will have a better result.

Data here in Excel format: http://www.econ.yale.edu/~shiller/
Hack as needed...

In other news, correlation does not imply cause...

The authors already did that for us and showed the unusual results driven by the Fed are indeed significant. From the article, "Might some of this be a coincidence? Highly doubtful. My colleague Matt Koppenheffer took market data going back to 1994 and randomly removed 136 days (eight per year for 17 years, or one for every FOMC meeting). The difference, compared with the unmolested market returns, was trivial. We ran the simulation several hundred times, removing different sets of random days. Nothing came within a third of the skew caused by removing the days shortly before FOMC meetings."

 

[M Paquette]

The authors already did that for us and showed the unusual results driven by the Fed are indeed significant. From the article, "Might some of this be a coincidence? Highly doubtful. My colleague Matt Koppenheffer took market data going back to 1994 and randomly removed 136 days (eight per year for 17 years, or one for every FOMC meeting). The difference, compared with the unmolested market returns, was trivial. We ran the simulation several hundred times, removing different sets of random days. Nothing came within a third of the skew caused by removing the days shortly before FOMC meetings."

I couldn't reproduce the result, but then I noticed that what they were pulling out wasn't simply the prior days trading, but a specific 24 hours from 2PM the day before the announcement until 2PM the day of the announcement, ending 15 minutes before the Fed announcement. That's a pretty specific window, which excludes the post-announcement moves.

 

[Masquernom]

As far as SS is concerned, don't forget that the US government does not have enough money to pay for all it's spending. The government borrows money every year, so the interest paid to SS can be considered from one view point as borrowed money.

The government spent the SS contributions and replaced it with government bonds. Since the government is running a deficit, it's now borrowing money to pay off the bonds to SS. Although that's a very simplistic view.

It's like you gave your relative money all your working years to save for your retirement. But your relative spent the money on other things every year. But he did put an IOU in it's place every year, and the IOU includes interest. Of course, your relative is now way in debt and is borrowing money to pay your retirement. How long will they be able to afford to borrow all that money? Let's hope it's till we're gone!

 

[donheff]

As far as SS is concerned, don't forget that the US government does not have enough money to pay for all it's spending. The government borrows money every year, so the interest paid to SS can be considered from one view point as borrowed money.

The government spent the SS contributions and replaced it with government bonds. Since the government is running a deficit, it's now borrowing money to pay off the bonds to SS. Although that's a very simplistic view.

It's like you gave your relative money all your working years to save for your retirement. But your relative spent the money on other things every year. But he did put an IOU in it's place every year, and the IOU includes interest. Of course, your relative is now way in debt and is borrowing money to pay your retirement. How long will they be able to afford to borrow all that money? Let's hope it's till we're gone!

I don't see why people focus on the what the Government owes SS as if it somehow different than the rest of the deficit. Using the example of your relative, the relative owes lots of other people far more -- like the Chinese neighbors. I hope you don't want to give a preference to their IOUs over our SS IOUs - wouldn't that be some kind of prohibited profiling.