People with cash savings and GICs often complain about the low interest rates available today. A Yahoo Finance article goes so far as to ask what’s the use of saving money? However, the higher interest rates of the past are nowhere near as good as they look.
In 1981, the average short-term government bond rates were about 16%. This looks pretty good compared to a 2% GIC today. However, we should take into account taxes. Assuming a 40% tax rate, these returns drop to 9.6% and 1.2%. The past still looks good. But, what happens if we take into account inflation? The inflation rate in 1981 was 12.5% and the current inflation rate is about 3%. So, savings lost about 3% in 1981 and lose about 2% today.
Comparatively speaking, interest rates on savings today don’t look so bad compared to the past. Savers in 1981 thought they were making money, but they weren’t; they were effectively spending their principal. Perhaps the larger lesson is that short-term cash savings rarely grow in real after tax terms.