The curse of low interest rates

By Allan Sloan, senior editor at large

(Fortune) -- What's good for America isn't necessarily good for all Americans. The case in point: low interest rates.

The government has cut short-term rates (which the Federal Reserve controls) to essentially zero, and has spent more than $1.5 trillion buying assets and mortgages to hold down long-term rates (which are controlled by the financial markets). This is good for the U.S. economy as a whole, and especially good for borrowers. But these artificially low rates are terrible for savers, especially for retirees who want to convert their lifetime savings into lifetime income.

Allan Sloan, senior editor at large

Interest rates are so low, the recent rate uptick on longer-term Treasury securities notwithstanding, that it takes a surprisingly large amount of money to generate even a modest amount of lifetime income.

Consider, if you will, the following numbers from New York Life, which I asked to price annuities for me, because it's an AAA-rated outfit that's helped me crunch numbers over the years.

How much would New York Life pay a 65-year-old heterosexual couple that forked over $100,000 for a lifetime annuity that would last until both members had died? The answer: $527 a month. (Same-sex couples would get a different benefit: higher for two males, lower for two females. Hence my use of "heterosexual.")

If you're a single 65-year-old male, your $100,000 would buy you $613 a month for your lifetime.

Back when long-term interest rates were much higher, payments on annuities were higher because New York Life or any other annuitizer could have invested your money at rates way above what they can get today.

They work off a spread -- the more they can earn on the money you give them for your annuity, the more they can afford to pay you. The lower rates are, the less they pay. And rates now are pretty low, by historical standards. I expect them to go higher -- but then again, I've expected that to happen for years.

These low interest rates have a secondary effect. They make pensions, whose benefits are typically fixed despite changing interest rates, enormously valuable these days. For example, if our hypothetical couple had $500 of monthly pension income that would continue through the lifetime of the last member to die -- what's known as a joint-and-100%-survivor benefit -- it would be the equivalent of almost $100,000 of savings, based on New York Life's numbers. And $500 a month isn't exactly caviar money.

Sure, as tax mavens among you know, an annuity payment is somewhat more valuable than the same-size pension payment, because all pension income is subject to tax, while part of your annuity income is tax-free because it's a return of your investment. But comparing pension income with annuity costs gives you a reasonable idea of how big the "capital value" of your pension is.

Please understand that I'm not recommending that you buy a New York Life annuity, or any annuity at all. I'm just showing you how much it costs these low-interest days to buy lifetime income from a highly-rated company. I'm also trying to show how valuable lifetime pension benefits -- and by extension, Social Security benefits -- are.

Let me offer up one more example. Let's say that you're part of a 65-year-old heterosexual couple that has $30,000 a year -- $2,500 a month -- of joint-and-100%-survivor pension income. What's that worth? Well over $400,000, based on a quote from our friends at New York Life, who were offering a $2,651 lifetime monthly annuity for $500,000. (It would be $3,128 for a 65-year-old single male.)

So cherish your pensions, if you're fortunate enough to have them. And remember that despite all the talk about how wonderful today's low interest rates are, there are lots of people for whom low rates are a curse, not a blessing. To top of page