Low interest rates squeeze the budgets of retirees

The Fed's rate cuts have dramatically lowered averageearnings from money markets.

Don Cox and his wife, Delores, no longer go to the movies, eat out, or even take trips in the car. The reason: The Burbank, Calif., retirees have watched their income shrink and shrink as interest rates have fallen. "I have an investment coming due next month," says Mr. Cox. "I'm getting 3.2 percent right now, but the bank says the best they can do is 1.4 percent."

The Coxes epitomize the plight of millions of retirees who have put their nest eggs in investments battered by low interest rates. The Federal Reserve has cut rates 12 times over 2-1/2 years, and was expected to reduce them again Wednesday.

Retirees count on investments to supplement Social Security and pensions. Many have been cautious all their lives with their money, socking it away only in certificates of deposit or government securities. But now, the declining income from these sources means that retirees' standard of living is declining, too.

Some say they are already eating into their principal to make ends meet. And a growing number say they're angry with the Federal Reserve, believing that the agency is trying to force them to invest in the stock market - a place they consider far too risky.

"The seniors and the savers have been sacrificed," says David Dill, a senior citizen living in Santa Barbara, Calif. "I define it in terms of a giant tax increase."

Economists believe the Federal Reserve is well aware - and maybe even somewhat sympathetic - to the plight of the seniors. "But it's not under active discussion at the Fed's interest-rate-setting meeting," says Lyle Gramley, a former Fed governor. "They must follow policies that are essential so the economy is not drifting into outright deflation like the Japanese economy."

This is not the first time interest-rate policy has hurt one group. In the early 1980s, high interest rates were hurting the home-building industry. The National Association of Homebuilders, in fact, asked its members to send the Fed two-by-fours. Some members of the Fed still have them in their offices.

"They came in by the truckloads," recalls Mr. Gramley, who is now a consulting economist at Schwab Washington Research.

Some members of AARP, the lobbying group for senior issues, wish the organization would do the same for them. AARP's policy director, John Rother, says the group gets letters and phone calls from people who assume AARP lobbies the Fed. "They want us to meet with Greenspan and stop this nonsense," he says. "But, of course, we would not - it's good for the whole economy."

Seniors probably can't expect much help from Congress either. In his appearances on Capitol Hill, Mr. Greenspan has yet to be asked about seniors' income and its relationship to interest rates.

There is, however, a Congressional Older Americans Caucus with about 60 members. So far this year, the entire caucus has not met, but the co-chairs meet on a regular basis, says a spokesman for Rep. Bill Delahunt (D) Massachusetts, one of the co-chairs.

If Congress did hold hearings, it would find that seniors are being squeezed because of the way some of the indexes are calculated. For example, the cost-of-living increases for Social Security are linked to the consumer price index. In January, the cost-of-living adjustment was 1.4 percent. Yet according to Bob Hayes of the Medicare Rights Center, prescription-drug prices have gone up 17 percent in the past year.

"This is a big issue. The CPI is not specific to an older population," says Jules Lichtenstein, a senior policy adviser at AARP.

Because interest rates have come down so quickly, census data doesn't help policymakers much either. Two years ago, income from investments was 15.75 percent, down from 16.21 percent in 2000.

"My guess is that income from assets will be much lower" this year, says Mr. Lichtenstein.

This is true. If a senior citizen had invested $300,000 in a one-year CD two years ago, it would have provided about $937 of monthly income based on a 3.74 percent rate. Today, the comparable CD would provide about $350 in monthly income.

The decline has caught many seniors by surprise. Mr. Dill, for example, follows the financial news, and particularly interest rates, closely. "People say, 'Why didn't you do something?' " he recalls. He explains he never expected interest rates to fall so far. "You were just caught in that downturn, and on any given day, you didn't want to make a decision - I just kept putting it off."

Now, with interest rates on CDs so low, many seniors are just tightening their belts. That's the case with the Coxes. "I talk to others, and it's the same thing - they are struggling," says Mr. Cox. "People are asking, 'What can I do? Who do we turn to?' "