[INSIGHT]The Downside of Low Interest Rates

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[INSIGHT]The Downside of Low Interest Rates

A friend of mine abruptly stopped going out a while ago. Two years ago he retired from a renowned company where he was a managing director. He is said to be home all day long, day after day, even though his wife keeps saying, "Please go out." Until last year he could afford to go out for drinks of soju with his friends, depending on modest interest incomes from his retiree pay. These days he cannot do this any more. He told me, "That is the only way not to lose my face at least." He bitterly explained his reasoning for his decision not to go out at all.

Another friend of mine told me another story. A group of retired friends had gotten together from time to time to share meals and drinks and each usually paid his own tab. However, one day one member of the group said with much hesitation, "I haven't drunk a glass of soju." He said so in order to find an excuse to pay less than the others, even if that could cause him to lose face a little. When the others teased him, he grumbled, "My wife reduced my allowance significantly because the interest rate on our savings account went down by half." As we began the era of low interest rates, unprecedented behavior by people living on interest incomes is appearing. Those who would play golf once in a while are now turning to mountain hiking, playing baduk, they are even turning up at the offices of alumni associations.

The steep downslide of interest rates is a shock to people living on savings. Companies, entrepreneurs and those who borrowed from banks are happy about it. But the low interest rates are a bitter reality for those who were forced to retire earlier than expected and are living on the interest from their retirement pay. The situation is even worse for those who have to pay for children's tuition and prepare for their golden years at the same time.

These days the interest rate on time deposit accounts at banks is from 5 percent to 6 percent. That is exactly half of last year's rate. It is not easy to get 400,000 won ($307) to 500,000 won a month for the interest on a deposit of 100 million won. There is an income tax on the interest too. Even with 300 million won on a time deposit account (I doubt there are many retiree with that amount of cash.), it seems to be very tough to lead an ordinary middle-class life. If the skyrocketing cost of living is taken into consideration, the real interest rate is, in fact, less than zero. Mutual savings banks and finance companies are much the same even if they are offering slightly higher interest rates. At the same time it is too risky to invest in stocks or in real estate. That is why most people have to settle with placing their money in commercial banks.

According to an estimate, more than 1 million people are living on interest income from their savings. They have suddenly met the fallout from low interest rates without time to adjust to it. The wind seems to be the second crisis for them following the foreign currency crisis.

Of course there are many people who were forced out of their companies without proper retirement benefits. And it is not desirable to see rich people with a lot of cash swagger with the money from high interest rates on their savings. But the recent downslide in rates is too steep, compared with the current cost of living and economic growth rate. Furthermore, the low rates are not helping the competitiveness of our companies or this country. There are signs that the low interest rate could result in a Japanese style long-term recession, a result of chain reactions starting with the contraction of consumption, bankruptcies of companies and eventually to the collapse of the stock market. I think we have to tackle the problem of low rates from the national economic perspectives.

The hidden sufferings of retirees will increase as time goes by. If we do nothing about this now, the suffering will not remain just on personal levels; it will eventually bring about the collapse of the middle class and a social upheaval. It would also take away the vitality of our society, which is aging rapidly. All this will result in a society in which everyone is poor.

It is about the time for the national government to come up with social and economic policies to take care of retirees. Government has to make sure retirees and elderly people can lead stable lives, spending their time on something meaningful or productive. People in their 40s and 50s have already been forced to endure significant sacrifices or sufferings resulting from the "failed economic policies" of our society. In the recent whirl of restructuring, people in their 50s were the first to be hit by the massive layoffs. Now we see similar cases in many people in their 40s.

It is too late to put off action. Now the government should hammer out comprehensive policy alternatives for retirees and the elderly. I suggest it start by examining whether the current interest rates are proper, given our economic reality. I also propose a tax cut for savings and personal pensions below a certain level. Programs for public pension funds should also be redesigned, reflecting market principles along with comprehensive measures to help the retirees.


The writer is an editorial writer of the JoongAng Ilbo.

by Kim Wang-ky

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