Deficit Stealth Tax Costs Savers Dearly
Interest Rates: That sub-zero return on nest eggs is the price retirees pay for federal deficits. Control of spending is the solution - a point Mitt Romney and Paul Ryan need to make.
The worst taxes of all might be those that don't wear the scarlet "T" but, instead, sap wealth by stealth. And nothing in this department matches the interest-rate engineering that is quietly but massively transferring money from savers to government.
It's not news, of course, that returns on liquid or insured investments are failing even to keep up with the Consumer Price Index. (By way of comparison, the CPI was up 1.4% year over year in July, while the Bankrate.com average for five-year jumbo CDs is just 1.03%.) What's less noted is just how much the savers' loss is the government's gain.
Compare, for instance, Washington's current debt servicing burden with what it would be under conditions more like the historical norm. At the end of last month, the federal government was paying just over 2%, on average across all maturities, for its $11.3 trillion in debt held by the public. (Another $4.7 trillion is owed to federal trust funds such as Social Security, but most debt growth has been on the public side.)
This points to an annual cost of about $230 billion - barely more than it was paying at the end of the last century. Since 2000, public debt has more than tripled. (It was below $3.5 trillion back then.)
You begin to see the picture. If Washington had to pay the average interest now that it paid in 2000 (6.4%), it would be paying $500 billion more each year to stay afloat. Just matching the average rate it paid at the end of the George W. Bush administration (3.2%) - it would have to pay $130 billion more annually.
Every year Washington adds another $1 trillion or so to the debt, making its dependence on low interest rates even worse. Like central bankers everywhere, the Federal Reserve is doing what it can to lower government borrowing costs, though of course this is not its stated mission.
Officially, it pumps liquidity into the banking system and keeps rates low in order to spur private-sector borrowing. But when the biggest borrower by far is Washington, Washington gets the lion's share of the benefit.
The biggest losers from this hidden tax are those who have accumulated savings and are now trying to live off them. Retirees and near-retirees, especially those without pensions, must be wondering if anyone is on their side. This is one issue on which Romney and Ryan can step forward with a persuasive solution.
They can offer a simple argument: The only way to get interest rates back to a level where savers get their due is to break the government's debt spiral.
Raising taxes won't work, because that will weaken the economy and interest rates will have to stay low to keep it from collapsing. The real answer is tax reform to spur economic growth along with entitlement reform to rein in spending over the long term.
It's time for Romney and Ryan to send this message, and for savers to tune in.
