Low Interest Rates Reflect Inequality, Not Boomers’ Savings

Blame the baby boomers. It’s a common sentiment among millennials that the generation born between 1946 and 1964 has ruined the United States and is responsible for the high cost of housing, the national debt, climate change, and low interest rates that punish savers.

That last one may not actually be their fault, according to Princeton’s Atif Mian, Harvard’s Ludwig Straub, and Chicago Booth’s Amir Sufi. Rates that are stuck near zero tend to correlate with economic stagnation and price bubbles, while also limiting monetary policy makers’ ability to respond to downturns by lowering rates further, the researchers observe. But the likely culprit for the current situation is the dramatic increase in income inequality, Mian, Straub, and Sufi find.

Shifting demographics and related increases in savings—particularly among the massive postwar generation—are widely cited explanations for the decline in rates. The researchers put this to the test by examining data from the Federal Reserve’s Survey of Consumer Finances Plus (known as SCF+), spanning 1950 to 2019. They focused on two key factors: the variation in savings rates across demographic groups at different points in time and the subsequent shifts in income share within these groups.

According to the baby boomer theory, as this generation hit middle age, its members began to save more. Younger generations don’t save as much, the argument goes, and thus borrow more. The oldest workers do not save, instead consuming all of their wealth before dying. Thus, the borrowing rates of younger generations must match the savings of the middle-aged group. If the middle-aged population is larger than the younger generation, there will be an imbalance, and interest rates will have to fall to stabilize the lending borrowing market. Thus, rates decline when a large population with high savings rates—such as the boomers—passes through middle age. The pattern should be reversing as the boomers age, retire, and stop saving.

However, the researchers’ data tell a different story. Mian, Straub, and Sufi examined the income distribution and savings rates of high-, middle-, and low-income households within each cohort—aged 18 to 34, 35 to 44, 45 to 54, 55 to 64, and 65 to 74. They find that savings rates within the groups varied far more on the basis of income than the rates across generations.