Retires hit but it’s for the good of all’

Reserve Bank of Australia governor Philip Lowe says he feels savers’ pain, but that lower rates are in the national interest.

Ian Henschke, chief advocate National Seniors Australia, said many older Australians keep all their money in cash.

The Reserve Bank’s decision to slash rates to a record low of 0.1 per cent has heaped further misery on savers, with governor Philip Lowe saying retirees hurt by plunging cash returns on deposits needed to carry “a heavy share of the burden” for the “collective good”.

Following the announcement of the rate cut alongside a $100bn bond-buying program, warnings were sounded about self-funded retirees being forced to rely more heavily on the age pension because of the hit to their incomes.

RBA governor Philip Lowe on Tuesday said “we understand their (savers’) pain — we discussed this at the board meeting today”.

“Many people wrote to me explaining the difficult positions they are in,” Dr Lowe said.

The governor acknowledged that the impact of lower rates “falls very unevenly across the community”, and that those relying on income from deposits “bear a heavy share of the burden here”.

“I understand why they are unhappy, (but) regrettably we find ourselves in this situation.”

Dr Lowe said those hurt by the drop in savings rates needed to appreciate there was an “issue of the collective good here”.

“Lower rates will help support spending and ultimately will create jobs, so the broader community will benefit from today’s decision,” he said.

National Seniors Australia chief advocate Ian Henschke said the “vast majority of older Australians keep a sizeable portion of their money in the bank”.

Mr Henschke said for those with cash deposits the best rates on offer were around 0.75 per cent.

“Older Australians understand it’s very difficult for people who are out of work through COVID. But the problem is older Australians can’t go back into the workforce, so they are totally reliant on income from their savings. We know the pension is not sufficient to live on because one in four pensioners live in poverty.”

Rice Warner executive director Michael Rice said partly self-funded retirees have “been smashed” by the rapid decline in rates over recent years, and that the drop in income earned on cash would push many into a heavier reliance on the government pension.

Eight years ago, a three-year term deposit earned 7 per cent. At that rate, Mr Rice said a single person receiving the full pension at $24,500 would have earned an additional $14,000 a year from deposits, before tax. Now the annual income from the same level of savings has dropped to more like $2000.

“The retirees who are fully self funded with $800-900,000 in savings or the like would have most of their assets in super — they will do OK,” Mr Rice said.

Instead, those with around $400,000 or less who have likely pulled money out of the retirement system and into cash “are the ones that suffer”.

“What happens in practice is they spend their money quicker and run out of money long before they die,” he said.

Dr Lowe said by creating more jobs and hastening the post-COVID recovery, the RBA was working in the long-term interest of savers by setting the scene for a more vibrant economy and, eventually, higher returns as a result.

“I would like to see that just as much as the savers,” he said.

Mr Henschke called on the government to relaunch, refashion and rebrand its pension loan scheme, which allows retirees to borrow against their home.