A Main Street Retirement Solution

Free money for seniors could provide a safety net for all retirees, but it cannot support the middle and upper classes in the manner to which they are accustomed. If you want more than a lower class income during your golden years, you need to save. The federal government is too broke to do more, between fighting multiple wars, supporting exploding entitlements programs and cleaning up the mess left by an unstable financial system, a system that routinely robs retirees.

For years many Republicans have said that Social Security is a poor retirement option, that stocks provide a better return on investment, and they do – if you invest over a long enough span. If you regularly contribute to a stock-based retirement plan, a volatile stock market works in your favor via the magic of dollar cost averaging. But the same math which makes dollar cost averaging such a good strategy when you contribute works against you when you draw upon your account during retirement. And then there are the tens of millions of fifty-somethings who didn’t build up a nest egg while they were young, low-salaried and taking care of children. They should make catch-up contributions, but it is rather late to put all those contributions into the stock market. They need to put at least some of that money into something more conservative and dependable…

Like bank CDs. Only, bank CDs are a terrible investment these days. Most banks are offering yields on the order of recent inflation rates. A small bump in inflation could mean negative real interest rates, and given recent loose money policies by the Federal Reserve, we could well experience Carter era inflation rates in the near future. Stocks could well be the more conservative investment.

The situation is unnatural. If we had an honest financial system, long term interest rates would be substantially higher than short term interest rates, which would be higher than inflation. Actually, we wouldn’t have inflation. And we wouldn’t have these boom-and-bust business cycles we suffer today. Even stocks should be less volatile on average.

But we don’t have an honest financial system. Our banks do the equivalent of kiting checks. They lend out money from checking accounts. They make long term investments using short term deposits. This works as long as fresh deposits make up for withdrawals. When they don’t, banks can discount their loan portfolios, borrowing short term to make sure there is enough cash in to handle withdrawals. This solves the problem as long as there is some other bank with cash to lend. When there is a run on the system as a whole, it crashes – unless the Fed prints up fresh money, robbing retirees with inflation.

A natural yield curve should never be flat. A long term loan is more costly to grant and more useful to receive. It is costly because it ties up money you might want in the interim. It is convenient because you have more options as to when to pay it back. But when the market reveals a natural yield curve, financial wizards craft schemes to arbitrage the difference. Banks and other institutions take their short term low yield deposits and make long term loans and/or buy long term financial instruments. It is a game of chicken. As long as total pool of deposits stays relatively constant, the pool of short term deposits acts as a long term deposit – except when it doesn’t. At this point banks go belly up unless they are “too big to fail.” Then the government steps in to the tune of hundreds of billions of dollars of taxpayer money to keep the system afloat.

We get some benefits from these shenanigans: interest checking accounts, low ATM fees, reduced rate mortgages. But we pay the price in financial instability, mass unemployment, huge taxpayer bailouts. And retirees pay the most of all.

Suppose banks had to use long term deposits to make long term loans. Interest checking would go away. (It used to be illegal.) Short term deposits would have lower yields since banks would be limited to making short term loans with the money. To get a good yield you would have to be willing to tie up your money for a long period of time. Patience would pay.

Retirement money is patient money. IRAs could be filled with high yielding long term CDs. We could close down the Fed and go back to a gold standard. Nominal rates would equal real rates. Retirement planning could be considerably more predictable. Seniors could know how much money they are going to receive for the next few years.