Why low interest rates make saving for retirement harder — and what the government can do about it
Lower interest rates may spur economic growth but they present a special challenge to those in (or nearing) retirement.
As older Americans prepare to leave the workforce, they are advised to move their assets toward safer investments, but those investments are “not going to yield very much" notes Douglas Holtz-Eakin, the president of the American Action Forum, who appeared on Yahoo Finance’s On the Move Wednesday.
He added that these lower yields could lead older Americans into riskier investments where “you face a fundamental tradeoff between expected return and risks and that's something that retirees have to think hard about and decide whether they want to manage that risk.”
Few expect interest rates to be high in the near term. In fact, the slowing economy is leading many to expect that the Federal Reserve will cut rates further — which are already relatively low — when they gather at the end of October.
"As we think about policy towards retirees, I think it places a premium on doing the things that the nation can do to lean against the demographics” says Holtz-Eakin, adding, "I think the big difference between the U.S. and Europe is Europe's inability to deploy fiscal policy and deploy better growth. We can and should."
Holtz-Eakin appeared as part of Yahoo Finance’s ongoing partnership with the Funding our Future campaign, a group of organizations advocating for increased retirement security for Americans.
One measure that may help is making its way through Congress this year. The SECURE Act was passed by the U.S. House of Representatives this spring and is currently awaiting action in the Senate. The bill includes provisions to encourage retirees to annuitize and gain more predictability in their retirement income. According to a summary of the bill, “the change will permit participants to preserve their lifetime income investments and avoid surrender charges and fees.”
Americans need “polices for better productivity growth and fiscal policies to deploy against the low-rate environment," says Holtz-Eakin.
The ongoing trade war with China isn’t helping on the productivity end of things. There is little optimism for a wide-ranging U.S.-China trade deal in the near term and Holtz-Eakin notes that the tariffs set to be implemented later this year may bite consumer confidence, a key driver of productivity, in a way that has been avoided so far.
"The real risk here is the next couple rounds,” he says. “If there's no deal and the president goes ahead with additional Chinese tariffs, which are largely targeted on consumer goods headed into the Christmas shopping season, that's a big risk and that's worth watching carefully."
Ben Werschkul is a producer for Yahoo Finance in Washington, DC.
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