Since 2008, due to the combination of near-zero interest rates and inflation, savers at banks and credit unions have watched the real value of their savings erode at the rate of about 2 percent a year, 26 percent over the last 13 years, per my calculations.
Now, amidst the fog of war on inflation, there appears a ray of hope: Interest rates on Treasurys and some brokered CDs are now in the range of 4 percent, higher than they have been in 13 years.
But while it feels good to be able to earn more than nothing, the fact is that savers are worse off today. Now, with inflation around 7 percent, savers are watching their accounts’ purchasing power shrink at 3-4 percent a year or more. The aggregate losses in the real value of the accounts of millions of savers over the last 13 years have been in the trillions and are mounting, yet this phenomenon so far has received little media coverage.
Many savers, having managed to put aside money for retirement, a child’s education, a medical emergency, or for the down payment on a new home, have been reluctant to put their savings at risk in the stock market or other speculative investments. They have kept their money in savings accounts and CDs at federally insured banks and credit unions or in Treasury securities.
Massive losses in the real value of savings over the last 13 years amount to a silent tax imposed on savers to fund the economic recovery, which in the process produced historic increases in wealth for leveraged investors.
Is anyone in government watching out for savers or even discussing their plight? The Consumer Financial Protection Bureau, created after the 2008 collapse to protect the financial interests of consumers, has focused its attention almost exclusively on protecting borrowers. The idea that savers might need a voice at the public policy table seems not to have occurred to anyone. It would appear there is more concern about losses experienced by speculators in cryptocurrencies than about the losses incurred by millions of ordinary, middle-class savers as a result of inflation and zero interest rate policies.
Are savers just collateral damage whose more than decade-long sacrifices are necessary to effect monetary policy? Can nothing be done about this? Are there policies that might be explored to redress the harm that savers are experiencing? Here are some options that might be considered.
Congress might make Treasury Series I Savings Bonds, which are inflation-protected, available to individual investors without any cap on the amount they can buy. These savings bonds, paying over 9 percent interest, currently are capped at $10,000 per year per individual and are only available through the Treasury’s website which is hard to navigate and sometimes crashes. These bonds could be made easily available through any insured depository institution or registered broker dealer.
Congress should amend the Humphrey Hawkins Act to require that the Federal Reserve, as part of its semi-annual report to Congress, provide a Savers Impact Statement, reporting on the impact of inflation on savers and giving an estimate of the aggregate loss in earnings and purchasing power of savings accounts due to inflation and interest rate policy.
Congress might also consider a refundable tax credit that would allow any federally insured financial institution to offer savings deposit accounts with a comparable yield to that on inflation protected Treasury Series I Savings Bonds. These Inflation Protected Savings Accounts would have an inflation adjustment feature like Series I Savings Bonds. They would be administered by the bank or credit union offering the account and would be a direct passthrough to savers (called out as such on the saver’s account statement, separate from interest paid by the bank).
Offering Interest Protected Savings Accounts would allow banks, including community banks and credit unions, to provide more loans to local businesses and individuals. Importantly, putting more deposits at regulated financial institutions would help to mitigate the increasingly obvious risks associated with relying on the unregulated shadow banking system and cryptocurrency exchanges. It also might help to slow the demise of community banks that are disappearing at a rapid rate.
These proposals of course would need vetting in the legislative process. They are put forth primarily to start a conversation about protecting savers. To be sure, making federally supported, inflation protected savings vehicles accessible to savers would have a budget impact, as does the annual inflation adjustment in Social Security payments. But to the extent that the federal government succeeds in controlling inflation, which it is best positioned to do, the budget impact will be reduced substantially.
Federal Reserve Chair Jerome Powell and his colleagues are fighting hard to get inflation under control. They deserve everyone’s support. The suggestions offered here would not deprive the federal government of any of the fiscal or monetary tools it currently has to control inflation but would simply protect savers from the constant depreciation of their hard-earned nest eggs. In offering a safe place to save, the federal government would, in effect, be repealing the silent tax on savings that has prevailed since the 2008 financial crisis.
Has the time come for Congress to consider the plight of savers who are responsibly trying to provide for their future needs? Should we start to encourage savings rather than quietly expropriating savers’ funds by inflation, even 2 percent inflation, if rates are kept at or near zero? In other areas where our social contract has broken down to the disadvantage of the “silent majority,” public opinion has slowly come to a boil when people felt that the establishment was not listening.
This is not a partisan issue: There are millions of hurting savers, Democrats and Republicans. Will anyone take up their cause? Might the current round of high inflation provide a catalyst?
Jeremiah S Buckley is a financial services lawyer practicing in Washington, D.C. Buckley was previously a minority staff director of the United States Senate Banking Committee, and he played an important role in drafting many of the laws that impact the consumer financial services industry today. This article reflects the personal views of the author and not the views of his law firm or any of its clients.