Low rates on savings

Question: If credit and money is so difficult to get right now, why are savings accounts still yielding only around 2%? Why can't we savers get a better deal? I remember routinely getting 6% at our credit union years ago, but that is long gone. Retirees and near-retirees want to know. Diane, Sinking Spring, PA

Answer: While Congress, the White House, the presidential candidates, powerbrokers, scholars and others struggle to come up with a way to contain the credit crunch, the immediate concern on Main Street is more prosaic and equally consequential: Will the money my family has set aside for everything from paying for car repairs to meeting a tuition bill to paying for high blood pressure pills be there when needed? Put somewhat differently, "what is the safe harbor," asks Zvi Bodie, finance professor at Boston University.

The answer is that there are several "safe harbors." Many are fleeing into a handful of options that are essentially risk-free parking places for money. The trade-off for a no-risk to low-risk safety net is a low interest rate and a low investment return. All the savings options involve relying on U.S. government backing rather than private sector promises.

Take short-term Treasury bills. Investors from around the world have decided to seek safety in T-bills. As I am writing this, investors are willing to get paid an interest rate of a mere 0.81% in return for owning a default-free investment, the 3-month T-bill.

You can do a little bit better with money market mutual funds that invest solely in short-term Treasuries, but not by much. For instance, the yield on the Vanguard Treasury only money market mutual fund is about 1.6%. And, of course, you mentioned your savings account. Well, assuming the deposits are insured by the FDIC, no one has lost a penny since the government's bank insurance fund was established in 1933 if the accounts had less than the insured limit. It looks like Washington is moving toward raising that limit even more, perhaps to $250,000. The $100,000 limit is something of a misnomer, however. It's relatively easy to park a multiple of that sum at the same bank and still get the total insured by the FDIC.

Again, because of concerns over safety--will my money be there when I need it--banks don't have to pay you much for your savings. The rates of certificates of deposit or CDs have gone up recently, but not that much.

One other point: Despite consumer inflation up over 5% so far this year, fears of inflation are receding. Higher inflation rates can drive up interest rates. But with the U.S. economy in recession, debt imploding, and the global economy slowing down it's hard to see the over all price level climbing higher anytime soon. (Nevertheless, I am a big fan of Treasury inflation protected securities, better known as TIPS. These default-free securities protect the investor from the ravages of inflation if it does ever pick up. TIPS offer a fixed interest rate above inflation as measured by the consumer price index (CPI). The bond's principal is adjusted as the CPI changes. That said, TIPS have one drawback for safety-minded individual investors: Taxes. In essence, Uncle Sam requires owners in taxable accounts to pay income taxes on inflation-adjusted gains before getting any of inflation-adjusted money at maturity. The trick to avoiding the tax hit is to own the bonds in a tax-deferred retirement savings account.)

Today's very low interest rates are painful for many savers, especially retirees. Still, my own feeling is that the trade-off is worth it.

IQuestion: Why can't we savers get a better deal? Retirees and near-retirees want to know. Diane, Sinking Spring, PA

About the author

Chris Farrell is the economics editor of Marketplace Money.

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