Who is harmed most by Federal Fiscal Policy? Minimum wage earners? Or retirees?

In the 1970’s monetary expansion led to an inflation rate that averaged over 7% while retired folks only earned less than 4% in interest on their passbook savings accounts.

Annual inflation

Policy Institute analysis of Census Bureau data. INTEREST RATES 1952 – 2009

 

 

Savings rates

The majority of retirees receive income from (1) monthly Social Security payments, (2) income from savings and investments, and (3) some must also take a part-time job just to make ends meet. For retirees over 65 years of age, these three sources provided an average income of $31,742 in 2012, according to a recent AARP Public Policy Institute analysis of Census Bureau data. For comparative purposes the poverty level for 2012 was about $23,800, thus retiree average income was less than $8000 per year above the poverty line.

Over the past five years the U.S. inflation rate has been averaging about 2% per year, while passbook savings accounts have been paying no more than 1.5% per year, generally less for short-term CD’s, money market, and checking and savings account interest rates.

Whether the government runs fiscal policy to generate high inflation or whether it runs fiscal policy to keep interest rates low, those unfavorably impacted most are the retired people making only a little more than the level we use to define poverty. The after-tax and after-inflation savings rates of the 1970’s, as well as the recent five years has been negative. Effectively the retired are losing money on their savings rather than making money.

When I was working my way through college I dropped off newspaper bundles to paperboys, delivered chicken and pizza, worked nights in a factory, and earned a little more as a teaching assistant. I still ended up having to supplement the costs of college tuition, books and living with student loans.

I never thought about demanding a “living wage” for any of these unskilled jobs, yet this is the battle cry among fast food, retail and other unskilled labor jobs today. How is it we should provide unskilled workers a living wage? There is a move afoot to increase the minimum wage, in some places 50-100% from the current federal rate of $7.25. States demand minimum hourly wages be paid starting at the federal minimum of $7.25 and in many instances even higher. The highest proposed state minimum wage I have read about recently is in Seattle, proposed at $15.00 achieved over a 7-year period. This will have the effect of increasing costs in already highly competitive industries such as fast food, retail, service and other unskilled labor. The higher labor costs would be passed along to the consumer or the businesses would cease to generate cash and profits and ultimately cease to exist.

The longer-term knock-on effect is that lower income earners will no longer be able to afford the higher prices for the food, goods and services these industries offer today. Restaurants and clothing stores would become affordable primarily only to middle and upper class income earners.

Instead of demanding a “living wage” for workers in jobs that require only a basic initial training period, we would be far better off focusing government policy on the ever-increasing burden on the expanding group of retirees. As fewer and fewer workers are supporting more and more retirees, a function of the retiring baby boom generation, the overall problem is exacerbated. We can start by changing federal fiscal policy to prohibit the government from penalizing savers in order to achieve fiscal goals.

RODD MANN | CPA | MBA | APICS CPIM | SIX SIGMA HANDS-ON-CHAMPION | DOCTOR OF BUSINESS ADMINISTRATION (candidate)

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