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Thu Dec 20, 2012, 11:55 AM

Chained CPI for SS = BAD. Fed Short Term Rates of 0% = GOOD. Can someone explain this to me?

Okay, so there's a littany of posts on DU regarding how God awful Chained CPI is for Social Security recepients. However, the same people who are complaining about it, also cheer the loudest when the Fed drops interest rates to 0% and keeps them there.

Many seniors live on fixed incomes which means that they depend on the interest that their savings generate as income. They cannot risk putting their money in the market because they cannot afford to take a loss if the market has a sudden drop.

Zero percent interest rates are a bigger cut to seniors than Chained CPI can ever be. Yet, many people here cheer when they see interest rates at 0%. No one calls Bernake a Cat Food Commissioner.

In sum, if you're angry because of Chained CPI, then you should be livid over 0% interest rates.

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Reply Chained CPI for SS = BAD. Fed Short Term Rates of 0% = GOOD. Can someone explain this to me? (Original post)
Yavin4 Dec 2012 OP
Harmony Blue Dec 2012 #1
GeorgeGist Dec 2012 #2
Yavin4 Dec 2012 #5
Harmony Blue Dec 2012 #6
reformist2 Dec 2012 #23
leftstreet Dec 2012 #3
Yavin4 Dec 2012 #12
leftstreet Dec 2012 #15
reformist2 Dec 2012 #26
dkf Dec 2012 #4
Harmony Blue Dec 2012 #9
Kelvin Mace Dec 2012 #21
dkf Dec 2012 #24
Kelvin Mace Dec 2012 #34
dkf Dec 2012 #43
Harmony Blue Dec 2012 #36
MannyGoldstein Dec 2012 #7
Agnosticsherbet Dec 2012 #8
Morganfleeman Dec 2012 #28
cthulu2016 Dec 2012 #31
Agnosticsherbet Dec 2012 #46
On the Road Dec 2012 #10
cthulu2016 Dec 2012 #11
Yavin4 Dec 2012 #16
cthulu2016 Dec 2012 #27
Yavin4 Dec 2012 #32
cthulu2016 Dec 2012 #35
Morganfleeman Dec 2012 #37
cthulu2016 Dec 2012 #39
plethoro Dec 2012 #13
Yavin4 Dec 2012 #18
plethoro Dec 2012 #22
Harmony Blue Dec 2012 #19
plethoro Dec 2012 #25
Kelvin Mace Dec 2012 #14
banned from Kos Dec 2012 #17
Harmony Blue Dec 2012 #20
MannyGoldstein Dec 2012 #30
leveymg Dec 2012 #29
JVS Dec 2012 #33
Yavin4 Dec 2012 #38
brentspeak Dec 2012 #40
JVS Dec 2012 #42
JVS Dec 2012 #41
muriel_volestrangler Dec 2012 #44
Nye Bevan Dec 2012 #45

Response to Yavin4 (Original post)

Thu Dec 20, 2012, 11:58 AM

1. Many seniors are on fixed incomes

thus the majority of their monies go towards living expenses.

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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 11:58 AM

2. Well ...

that would be a red herring.


Thanks so much for playing.

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Response to GeorgeGist (Reply #2)

Thu Dec 20, 2012, 12:01 PM

5. No. It's Not. 0% Interest Rates Are Bigger Cuts to Seniors Than Chained CPI.

So, why aren't 0% interest rates just as bad or worse than Chained CPI?

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Response to Yavin4 (Reply #5)

Thu Dec 20, 2012, 12:03 PM

6. That is not true at all

you know it, and we all know it. Unless you put the vast majority of the monies you generate (or seniors case, receive) into savings that argument isn't a strong as you believe.

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Response to Yavin4 (Reply #5)

Thu Dec 20, 2012, 12:22 PM

23. Most seniors aren't rich enough for that to matter.

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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 12:00 PM

3. Any stats on the billions seniors have in their savings accts?

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Response to leftstreet (Reply #3)

Thu Dec 20, 2012, 12:09 PM

12. Here's some data



They are being punished for their sensible habits with low interest rates on their savings. The ones hurting the most are those who rent, instead of owning their residences, and who keep their money in interest-bearing accounts, like certificates of deposit and money market funds, instead of risky stocks.

Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute for Policy Research, explains the size of the financial pain this way:

“If interest rates were 2 percent rather than 1 percent, the average senior would have an additional $3,200 in income,” if 10 percent of income comes from interest on savings.

“If rates were 4 percent, the senior would have an additional $9,500. If rates were 6 percent, the senior would earn $15,800 more per year,” Furchtgott-Roth writes in a new institute report.


http://www.mysanantonio.com/business/business_columnists/david_hendricks/article/Seniors-are-getting-hurt-by-low-interest-rates-on-4091143.php

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Response to Yavin4 (Reply #12)

Thu Dec 20, 2012, 12:10 PM

15. No. Stats on how many seniors are filthy rich with savings n/t

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Response to Yavin4 (Reply #12)

Thu Dec 20, 2012, 12:26 PM

26. So seniors have an average of $300,000 in savings, but the typical senior has far, far less.


In other words, How to Mislead with Statistics 101.

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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 12:00 PM

4. If you have assets you don't get sympathy points here.

 

Thus no acknowledgment of the difficulties seniors living on their bonds, CDs or savings accounts experience and big sympathy for people who have nothing except social security.

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Response to dkf (Reply #4)

Thu Dec 20, 2012, 12:07 PM

9. Is this a serious post?

Yes people who are only on social security tend to attract more sympathy than those with bonds, CDs or saving accounts. Social security benefits are considered a fixed income, and if you don't meet a certain threshold you don't even need to file taxes.

Given the value of money increases over time this is Econo 101 stuff.

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Response to dkf (Reply #4)

Thu Dec 20, 2012, 12:16 PM

21. Well, don't see that

since both are getting screwed. But those living only on SS are getting screwed more, since that's all they have.

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Response to Kelvin Mace (Reply #21)

Thu Dec 20, 2012, 12:22 PM

24. The point was to force people in 0% interest to move to riskier assets.

 

But people who are scared prefer safety over income.

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Response to dkf (Reply #24)

Thu Dec 20, 2012, 12:37 PM

34. Well, some income

beats NO income.

And we know we can always trust Wall Street managers to play fair, right?

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Response to Kelvin Mace (Reply #34)

Thu Dec 20, 2012, 01:56 PM

43. That was the Fed's doing.

 

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Response to dkf (Reply #24)

Thu Dec 20, 2012, 12:51 PM

36. Most people on fixed incomes use the majority of their monies

on living expenses (e.g food, medicine). The entire business models of CVS/Walgreeens, and to an extent supermarket chains, plan on fixed incomes spending their money when they receive it the first two weeks of the month. Choosing to save in safer investments over other riskier ones isn't even an option for fixed income individuals.

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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 12:03 PM

7. I am, and have been vocal about it.

But cutting Social Security is even worse, as it savages those who are so destitute that they do not have significant savings.

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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 12:04 PM

8. Fed 0% interest rates are on money loaned to banks and large financial institutions.

...not seniors living on interest on savings. The Fed doesn't have bank accounts of T-bill accounts for savings.

I hope that helps.

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Response to Agnosticsherbet (Reply #8)

Thu Dec 20, 2012, 12:27 PM

28. Fail

Savings rates on deposits are inextricably linked to the Fed's zero interest rate policy.

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Response to Morganfleeman (Reply #28)

Thu Dec 20, 2012, 12:33 PM

31. Why be both rude AND hopelessly wrong?

"Savings rates on deposits are inextricably linked to the Fed's zero interest rate policy."

Do you know what inextricable means?

It does not mean "as a matter of mere convenience on the part of banks, but not actually linked in any way beyond the banks changeable policy decision to link them"

Do you actually think banks are required to pay interest on deposits?


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Response to Morganfleeman (Reply #28)

Thu Dec 20, 2012, 08:56 PM

46. No they are not inextricably linked...Your post is marked F-

Banks set their own interest on savings. Money loaned by banks does have a relationship to the Fed's 0% interest rate. When it is cheaper for banks to borrow money from the Fed, they lower their own interest rates. But the banks do not ever loan with 0% interest to people who borrow from the banks. I should add, that a loan is never savings.

0% interest is used to stimulate the economy by putting money in the hands of banks who then loan it to customers who pay interest to the banks.

0% certainly affects government bonds by bringing the interest rate down, but they still don't go to zero. During the financial meltdown, I read that some big institutions bought bonds at 0% interest just ot park their money there rather than big banks. but, large institutions are not elderly poor living on interest.

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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 12:07 PM

10. Interest Rates of Zero Stimulate the Entire Economy

Seniors of modest means who live on fixed interest payments are a small minority. By definition, they still have assets in the form of the savings the interest is generated on.

If the proposed solution is to raise interest rates, that would endanger the current recovery. That's why the Fed isn't doing it.

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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 12:08 PM

11. This is based on a basic economic misunderstanding

What banks pay on saving is not low because the Fed says so. It is low because there is no demand for deposits.

If the Fed raised rates tomorrow the global economy would crash (a great help to seniors?) and banks still would not be paying interest on deposits.

They don't want your deposits. In current conditions your deposits do not result in profits for the banks because there is low demand for credit.

The whole Fed policy and Seniors interest income thing appears to be something someone, somewhere is ginning up and a lot of folks fall for it, but it makes no sense.

Interest rates are low because the global economy is weak with little demand for credit from credit-worthy borrowers.

Period.

Fed interest rates are, in fact, too high. They are at zero only because they cannot go below zero.

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Response to cthulu2016 (Reply #11)

Thu Dec 20, 2012, 12:11 PM

16. What Banks offer as interest rates on savings and CDs is based on the Fed's Interest rates

I was getting 5% interest on CDs back in 2005 when the Fed rates were at 6%. I'm getting .5% today because the Fed's rates are at 0%.

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Response to Yavin4 (Reply #16)

Thu Dec 20, 2012, 12:26 PM

27. Yes, voluntarily. If the Fed raised rates today every bank would simply cancel that policy.

When banks peg a rate to a Fed rate they are operating on the assumption that what the Fed does is based on sane analysis of the real economy.

If the Fed raised rates tomorrow that would be insane, and not based on anything in the real economy.

You can work this out for yourself. What aspect of higher fed rates would create more demand by banks for deposits to use as the basis for profitable lending? Higher rates would not increase demand for borrowing.

Higher inflation or higher economic growth would increase rates, but increasing rates could not create economic growth.

Another way to look at it: If banks are currently willling to pay more on deposits than why don't they? If there is any money to be made today from more deposits then any bank can get all the deposits they want by paying a higher rate. Money would flock to any such bank.

The "raise interest rates" people are like people who think that a broken thermometer changes the temperature.

The connection between fed rates and savings rates is practical, not magic. It is based on the Fed setting rates where the real economy says they should be, and right now that is zero.

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Response to cthulu2016 (Reply #27)

Thu Dec 20, 2012, 12:36 PM

32. The Fed's Interest Rates Policies Is More About Bailing Out The Big Banks

We're going on 4 years of 0% interest rates, and do you see the economy booming??? I don't. I see an economy barely moving along.

Regardless, 0% interest rates have hurt seniors more than chaining the CPI will ever do.

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Response to Yavin4 (Reply #32)

Thu Dec 20, 2012, 12:49 PM

35. Your argument is the same as when RWers say the stimulus didn't work

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Response to cthulu2016 (Reply #27)

Thu Dec 20, 2012, 12:56 PM

37. I'm sorry

But where did you get your financial education? I've been in the working in the money markets and debt capital markets for more than 15 years, and what you just said is patently wrong. Fed Funds Rates directly impact LIBOR, the Prime Rate, CD rates and general savings rates. Raising Fed Funds reduces the money supply via open market operations, which increases the cost of money hence higher savings rates for instance. Monetary policy 101.

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Response to Morganfleeman (Reply #37)

Thu Dec 20, 2012, 01:18 PM

39. Your education hasn't helped you much

You want to believe that banks will chose to pay higher interest on savings than the rate of inflation if the Fed raises the overnight rate arbitrarily, so you are a very silly person.

Existing contracts pegged to a Fed rate will go forward under their existing terms. Any policy formally connecting any rate to the Fed would be severed as fast as legally possible.

And the prime rate would diverge from Fed rates as fast as possible. (As a person of your vast education knows, the prime rate is not formally connected to the Fed. It is set by banks, the same as LIBOR is, and is in not way required to follow Fed policy. It does so in practice today only because the Fed doesn't do things like raising rates in our current environment.)

As for the effect of the overnight rate on the cost of money, since an arbitrary fed hike (not supported by any real world economic condition) would collapse what lending we currently have, the demand for money would plummet, and banks would not borrow from the overnight window, but would find other methods.

The Fed cannot set the price of money unless the Fed is the cheapest game in town. That is their power. If the Fed arbitrarily raises rates to a level not supported by fundamentals they would not remain the cheapest game in town, and their rates would lose relevance to real world banking.

Set the overnight rate at 5% arbitrarily today and nobody would go through the overnight window. Banks would be lining up to cover that action at 4%, which would be a windfall for interbank transactions in the real world of today.


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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 12:09 PM

13. What? I can deal with low interest rates because I know where to

 

get better returns. Old people can't fix the results of a chained CPI adjustment because they have no way to attack it. It would be nice if some of you Obama supporters talked to a few seniors every once in a while. I can tell you this: if the election was held in 30 days, the results would not be the same under this new directional attack on seniors. And I talk to hundreds of them almost daily.

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Response to plethoro (Reply #13)

Thu Dec 20, 2012, 12:13 PM

18. Old People Can't Take on the Additional Risks That You Can n/t

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Response to Yavin4 (Reply #18)

Thu Dec 20, 2012, 12:19 PM

22. And so?....... This unusual answer doesn't exactly encourage the switch to a chained CPI.....nft

 

dddddddd

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Response to plethoro (Reply #13)

Thu Dec 20, 2012, 12:14 PM

19. +1 Thank you

The majority of customers at supermarkets, CVS,Walgrees, Kmart, Walmart, etc are....seniors, and that trend will continue and only intensity as more boomers are eligible for social security.

These private businesses plan around fixed incomes spending at the start of each month, which is why their most lucrative deals come the first two weeks of every month. But the middle of the month is considered a dead zone so corporate doesn't allocate many hours for the store manager to distribute for the employees during these lulls.





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Response to Harmony Blue (Reply #19)

Thu Dec 20, 2012, 12:23 PM

25. Your welcome. I would say, Don't Worry, but that

 

would be stupid. I can say that I and many others are working to protect old people from this idiotic direction the President is taking on Social Security. And the House is about ready to bail on him. I've got to get ready for work, Harmony Blue. But keep the faith, whatever that may be for you. Bye.

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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 12:09 PM

14. That 0% rate is great if seniors were banks borrowing money from other banks

But most aren't borrowing any money, and even if they were it would not be at 0%.

Also, with interest rates this low, safe investments like T-Bills and CDs are paying a paltry 1%+, not enough to keep up with a 3%+ "official" inflation rate (not to mention the actual 6%-7% REAL inflation rate).

The buying power of a fixed income shrinks every year because the CPI already understates actual inflation by 3%-4%.

An informative piece on the CPI here:

http://www.dailykos.com/story/2012/12/19/1172060/-Understating-the-CPI-101-or-Starving-Grandma

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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 12:12 PM

17. The OP has the right idea.

 

COLA's have been small to non-existent anyway due to the Great Recession and Credit Crash which led to the loser Fed funds rate.

Why get all bent out of shape on a different CPI calculation? The COLA's won't change because inflation is dead.

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Response to banned from Kos (Reply #17)

Thu Dec 20, 2012, 12:15 PM

20. No one claimed it is ideal

but a chained CPI for social security makes it worse.

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Response to banned from Kos (Reply #17)

Thu Dec 20, 2012, 12:30 PM

30. Because of a concerted effort to screw the 99%, not *just* because of our current depression

COLA adjustment formula is already substantially lower than the CPI-E used to measure increases in what older Americans pay due to inflation.

Our banker-caused depression, along with the extraordinary efforts in process to keep the bankers as wealthy as possible, just made it worse.

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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 12:29 PM

29. It's the same reason the Fed bails out banks with billions and not a penny more goes to poor people.

The purpose of both the Fed and the Treasury bailouts is to keep the banking system solvent and investors well-compensated. To hell with the hindmost, seniors on Social Security don't make Wall Street rich and don't maximize returns - literally, that's the thinking behind the Chained CPI for SS.

It's called Capitalism. But, you knew that.

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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 12:36 PM

33. Chained CPI hurts recipients across the board Zero interest rates....

isn't a concern to the poorest recipients because they have no savings. In fact, for recipients with debts a higher interest rate would be bad. Those who have savings are relatively well off compared to other retirees. To put it shortly, low interest rates hurts retirees on the top end, chained CPI hits them on the low end.

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Response to JVS (Reply #33)

Thu Dec 20, 2012, 01:17 PM

38. The President's Proposal Protects The Most Needy Seniors

Let's keep in mind that the president would accept such a deal, only if seniors and other recipients closest to poverty can be protected from adverse effects, while boosting benefits for the most needy. And, as with each of the previous iterations of this proposal, it will likely come with a new special minimum benefit to ensure that for the first time ever, no senior on social security has to live in poverty. Actual liberal policy think tanks (as opposed to screamtastic loudmouths) like the Center for Budget and Policy Priorities and the Center for American Progress have endorsed approaches exactly along these lines. And Leader Pelosi, who has more progressive bona fides in her left toenail than all the howling "Left" groups combined, just let the cat out of the bag:


http://www.thepeoplesview.net/2012/12/dear-liberals-chained-cpi-is-not-cut-to.html

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Response to Yavin4 (Reply #38)

Thu Dec 20, 2012, 01:23 PM

40. "the most needy seniors"

Considering that most seniors are needy to begin with, can we see your Third Way definition of the 'most needy'?

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Response to brentspeak (Reply #40)

Thu Dec 20, 2012, 01:32 PM

42. Corporations over 65 years old?

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Response to Yavin4 (Reply #38)

Thu Dec 20, 2012, 01:31 PM

41. How?

I'm not familiar with the intricacies of this debate and haven't picked a side. I do know though that chained CPI is a way of decreasing the COLA, and I don't like that. The whiny article you link to doesn't explain much but I found it interesting that it claims that a "progressive" feature of the chained CPI is that it bumps more people into higher income tax brackets. Doing so is actually taking some of the progressiveness out of the progressive taxation structure that is the basis for income tax brackets. I don't think the people at your link have a good understanding of economics.

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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 02:09 PM

44. You made a list of the DUers who welcomed the drop in interest rates 4 years ago?

And now you've compared them to people talking about CPI?

Wow. You're a bit obsessed, aren't you?

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Response to Yavin4 (Original post)

Thu Dec 20, 2012, 02:24 PM

45. I would advocate a special US savings bond for seniors only

that would pay a higher rate, something like 3 or 4 percent. It is true that older folks are less comfortable with stock market type investments as their investment horizon is shorter. A special senior savings bond would go a long way towards helping seniors who have saved up a nest egg.

If I was the AARP I would be lobbying hard for something like this.

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