How Lower Interest Rates Could Affect Older Adults

An older couple look at paperwork while sitting on a sofa in a financial planner's office.

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published 9 April 2024

It’s been four years since COVID-19 reared its ugly head, yet we’re still dealing with the damage it left behind. Since its start in 2020, the pandemic has thrown our economy into a frenzy, forcing the federal government to try to prevent a recession while combating inflation. This has led to a series of changes — some specifically targeting interest rates. Since 2022, the Federal Reserve has raised key interest rates nearly a dozen times, impacting things like the stock and housing markets. But how is it impacting federal programs like Social Security?

Generally speaking, lower interest rates seem like a good thing, especially when it comes to making big purchases like buying a new home or car, but that’s not the case for retirees who are relying on Social Security benefits or fixed-income securities for income. Here’s why: Lower interest rates lead to lower yields on fixed-income assets, which means the monthly payments retirees rely on will most likely be lower than expected. This could become a real problem for older adults who depend on this income to pay bills and buy groceries. But lower interest rates don’t just impact older adults — they affect Social Security’s finances, too.

We know that Social Security is funded in part through taxpayer dollars, but it also has two separate trust funds that are used to help pay recipients. Retirement and survivors benefits come from the Old-Age and Survivors Insurance (OSAI) Trust Fund. Similarly, the Disability Insurance (DI) Trust Fund pays those on disability. Social Security taxes and other income not being used to pay benefits in the current year are then deposited into these accounts.

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Now here’s where the interest comes into play. By law, the funds in both trusts must be invested into special U.S. Treasury bonds guaranteed by the government. From there, market-rate interest is paid to the trust funds on bonds they hold. Once they’ve matured, or are needed to pay benefits, the Treasury redeems them. So, lower interest rates mean a lower amount of money is being deposited into the accounts. So, does this mean higher interest rates are better?

The answer to that question really depends on the state of the economy. High interest rates are good for Social Security’s trust funds because more interest can be generated, but if high interest rates are being implemented as a response to an overheated economy, as we’ve experienced in the past few years, the potential for a recession is there. A recession leads to job losses, meaning payroll tax revenue would decline, and it’s a domino effect from there.

While certain aspects of a recession, like job loss, may not directly impact a retiree’s Social Security check, the inflation caused as a result definitely will. This is just one of many reasons why it is so important to adequately plan for retirement. An estate, tax and financial planner can help you account for these fluctuations and present other alternatives to help supplement your income, ultimately giving you more financial control in your retirement.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Patrick M. Simasko is an elder law attorney and financial adviser at Simasko Law and Simasko Financial, specializing in elder law and wealth preservation. He’s also an Elder Law Professor at Michigan State University School of Law. His self-effacing character, style and ability have garnered him prominence and recognition throughout the metro Detroit area as well as the entire state.