Chart of the Day: Negative term deposit returns

Today’s chart comes from our own Rumplestatskin, who has received many requests to compile a chart comprising the real (i.e adjusted for inflation) after tax (RAT) returns on term deposits for Australian investors (click to enlarge full size):

It’s quite obvious that savers have been punished since the secular shift from the turn of the century (observable worldwide, largely as a result of Greenspan reinflating risk markets post-NASDAQ bubble) to effectively zero return on their capital.

The behavior of private savers is shown clearly in the RBA’s Household Savings Ratio (HSR) chart, updated from the Chart Pack released last week:

The secular decline in savings culminated in rational dissaving in the early noughties, leading to an increase in secondary asset (e.g houses and shares) values, before reversing to the current “dis-leveraging” and rising HSR, well over 10% of income, even though the cash rate has returned to below average nominal lows:

This behaviour of increased savings during low or zero interest rate policy (ZIRP) with subsequent negative RAT returns is the antithesis of common economic wisdom where such conditions should increase investment in risk assets and spur economic activity.

Latest posts by Chris Becker (see all)


  1. ….if only I knew where to put it, and then get my wife to agree with me…..that came out wrong.

  2. Savers get punished even further, according to Infochoice:

    term deposit and online savings account rates have dropped up to 0.55 percentage points in the past month – double the Reserve Bank of Australia’s November rate cut of 0.25 percentage points.

  3. Ow, I wondered why I was feeling poorer. But as AsYouLikeIt pointed out it is hard to know what else to do with your money at the moment. It is time that the ATO allowed people to subtract inflation prior to being taxed on the interest. After all taxing inflation is just taxing people for having savings and if that is the case they might as well just ask for a portion of peoples savings every year.

    • If you agree that negative gearing is basically just pushing tax revenue collection into the (hopeful) future, then why not do the same (since I believe NG has a very slim chance of ever being changed) with interest?

      i.e increase consumption taxes. This pushes forward the taxation of that income.

      Eliminate the tax on savings and increase the GST to say 12 or 15%

      That would go someway to leveling the playing field between savers and debtors without having to raise interest rates (and thus pushing speculative money into the AUD and crushing exporters…and so forth)

      • “i.e increase consumption taxes. This pushes forward the taxation of that income.

        Eliminate the tax on savings and increase the GST to say 12 or 15%”

        I like it. And at least then the govt still brings in some tax on the savings when individuals spend it.

        Having said that, I am also in favour of a pure consumption tax to replace PAYE income tax, with retention of capital gains.

        • The problem is: You have to have saving to benefit. What if you don’t ie: the less well off in our society? Then @ 15% GST you pay 50% more tax, and don’t have a RWT savings off-set.

          • Good point Janet, which is why I advocate a reduction/elimination in lower income tax brackets, which is slowly being done (one of the benefits of the Carbon Tax).

            This must continue, in line with wholesale welfare reform, because the marginal tax rate for many low income workers approaches 100% because of welfare/tax overlap.

          • Yes the dreaded high EMTR’s as welfare is withdrawn. A massive disincentive to work.

            One thing I really like about the carbon tax package is the reduction of tax rates for low income earners.

          • Yes I recognise those issues.

            There are solutions like “prebates” which are messy, but I would suggest it could be instead compensated by adding utilities, insurance and rent/associated fees to the GST exemption of fresh food, education, health and water/sewage.

    • rob barrattMEMBER

      Suggestions about removing certain taxes & increasing GST appear to be a good idea on the surface as GST is {I understand) the cheapest tax to collect. The classic example of an expensive tax is the television license in the UK. When you buy a TV the vendor is obliged to inform the TV licensing control authority. This has vans driving around trying to monitor signals from homeowners who are not licensed (reminiscent of the gestapo trying to find French resistance operators). If they burst in to your house they have to prove that the TV is on, and that you are watching currently broadcasted material, rather than playing back recordings, for which you do not need a license…say no more.
      Since 99.9% of households have a TV, it appears that huge costs could be avoided by abandoning this scheme & every other dog licensing type of idea and putting up GST by a %.
      The problem with this approach, and especially in Australia, is that these taxes are set up in order to expand the government departments administering them. It’s about civil service employment, not efficiency or fairness. That is why nothing will change, albeit that there may be very good reasons for doing so.

  4. Negative RAT for us savers and the mega mortgage mugs get all the media attention and the poltical handouts.
    It is time private savers in this country organised themselves into a group and maybe plan a bank run to get some attention.

    • “It is time private savers in this country organised themselves into a group and maybe plan a bank run to get some attention.”

      I’ve been thinking this as well.

      It would also be nice if there was a group out there that only represented private savers. You could nominate an amount and period of time that they could put your money on their books. This group could then shop a large pool of private savings around to find a better rate of return.

      Probably not plausible, but these are the crazy ideas that occur when you start losing money on savings.

    • Mr SquiggleMEMBER


      [It is time private savers in this country organised themselves into a group and maybe plan a bank run to get some attention.]

      They already are organised in an internet-age sort of way, chasing the introductory offers on netSavers and switching between banks. For example

      If you:

      1) have a netSaver product which usually pays the RBA cash rate; and

      2) are sitting on a reasonable amount of stash because you have saved a deposit but have been priced out of the housing market (say approx. $120,000k)

      phone up your bank and say “I am thinking of going to another bank because they have an introductory offer of +1.25% over RBA cash rate.”

      Your bank will offer you their introductory rate, just to keep you.

      They need to keep your deposits, and this is well known, particularly by retirees who love guarnateed bank savings.

      I heard about this from my Mum.

      For example today, Wpac 1 year TD rate is 5.30%. By Comparision, eSaver + Intro rate is 5.50%.

      Why bother with Term deposits?

  5. Unbelievable. You should try and write an article for the MSM and get this chart published. It’s a disgrace that banks and the mortgage industry continue to receive so many benefits and tax-money, which comes from the prudent.

    It seems the world is at war with anyone who isn’t a speculator!

  6. It’s like the EU/US where savers/investors are pushed to invest funds into equities to ‘try’ and stay ahead of inflation. And as we all know the CPI is a manufactured number and not a real cost of living indicator, but it is helpful for the government to keep their off balance sheet liabilities in check.

  7. Of course, there’s always the precious metals alternative. They have had a pretty good rate of return in the last 10 years. What other alternative is there?

    • Dividend paying shares – average yield since 1950 is 5.4%, although last 20 years its only been just above 4% and that’s for the index, not individual stocks, plus franking credits (which can increase this return by 30-40% to around 5-6% before tax and inflation, depending on your structure)

      You have to take the volatility with that as well…is it worth it when you can get 5-6% in a term deposit?

      • “is it worth it when you can get 5-6% in a term deposit?”

        Probably depends a lot on your investment purpose and horizon. If you want the long term income stream with a built in inflation buffer, and don’t care about the capital volatility, it has generally been a good deal. Over the long term, dividends tend to rise at or above the inflation rate.

        Just so long as you don’t ever get in a situation where you have to sell at the wrong time!

        • Alex, I personally use that strategy in my super, where I collect good dividend paying stocks, but I hedge them (short via CFD) because I want to hold them over the long term for the possible compounding effect of the yield, and the tax advantages of the franking credits within super.

          Outside super, I have to resort to speculation…i.e my trading business, because I can’t wait 30-35 years to access my “retirement” savings in super…

  8. Been thinking of parking some of the cash into royalty companies like Royal Gold and McEwen if the term deposit goes further south.
    Could commenters share some of their prob more informed opinions on that?

  9. Given that the 2 year return on real estate and equities has been negative in nominal terms, is a negative RAT on term deposits all that bad? Where else are you gonna put it? Gold? Most high yielding stocks (Banks, Telstra etc) have lost 10% or more over the past two years.

    • “2 year return on real estate….has been negative in nominal terms”.
      That isn’t true. The ABS 8 cap city index shows a rise of 7.4% between Sep2009 and Sep2011. Add net rental returns of about 3% pa and the pre-tax return on houses over the last 2 years has been over 6% pa – higher even than most term deposits.
      The ABS show a small capital loss for just one cap city over the last 2 years (Brisbane, down 1.2%) but even this is more than offset by the net rental return.

  10. Beware any rise in the non bank financial insitutions in Austraia. Just have a look at the finance compay debacle that occurred in New Zealand. Billions of savers deposits lost when these quasi-banks went belly up. They did offer higher interest rates whilst they were still solvent though…..

    • I’m assuming this chart is for tax rates of around 30% and 45%. Could we please see a chart that compares these to 0% tax and 15% tax?

    • StanGoodvibesMEMBER

      yeah but it was only marginally higher i.e. 10% p.a. when banks were offering 8.5 to 9%.

      It was never worth the risk, just clever marketing using ex-tv presenters to trap the gullible (mostly the elderly).

      I’m using the historically low rates (in NZ) and the exchange rate WIN between here and NZ to pay off mortgages as quickly as possible. Seems the safest thing to do at present…

  11. I suspect the calculation methodology and the use of aggregates is probably overstating the case relative to what is really going on. Just as a back of the envelope exercise, for the best part of this year term-deposits from even small players has been around the 5.4% mark on average across all of those maturities. Not sure how you get to a negative real return from there. Many people are probably behaving perfectly rationally, even before they factor volatility into the equation.

    • 5.4% at 30% tax rate give 3.8% after tax (or 3.0% at 45% marginal rate).

      CPI was 3.5% for the year to Sept 2011.

      Some of the bank promotions offer better returns than the average used here. So if you shop around regularly, you will do better. Unfortunately I don’t have future on the actual returns being received by account holders (as in, how many get the special rates vs the standard rate).

      A chart using the Banks best promotional offer rate on TDs from 2002 is here (not 100% sure this link will work for you)

      It shows that at the lower income tax rates, you could make positive returns (sub 1% on average) over the last decade.

      The other problem, which was alluded to in a previous comment, is the high effective marginal tax rates for some low income earners and families. They may officially pay 30% marginal rate, they may have centreline benefits (Family tax benefits, and child care subsidies) that are means tested, and usually fade out a 20-50c in the dollar. Giving effective marginal tax rates of 70% plus.

      Some discussion here

      Obviously with a zero tax rate you make money. Again, if this works, here a chart with a 15% tax rate included and the promotional rates on TDs since 2002.

      I also take flawse’s point that using the headline CPI, as we’ve discussed at this site before, is a pretty conservative estimate of the actual increase in the cost of living.

      It is all food for thought.

      • Thanks for the response, and yes, a big can of worms for thought. As to the question of ‘increased savings during low or zero interest rate policy … (being) the antithesis of common economic wisdom where such conditions should increase investment in risk assets and spur economic activity.’ – I would say that if people can cherry pick their own assesment of inflation, factor in compounding, and the timing effects of tax payments – then most savers are probably behaving perfectly rationally.

        • If you cherry pick you come up with way negative interest rates for savers. RAT interest rates for borrowers say for housing investment is marginally positive.
          So taking the ABS stats for the moment is not cherry picking. They take the most positive slant on inflation that is possible and they cannot assess some of the real inflation at all.

          I’m not arguing that people are not acting rationally. I think they definitely are in the structure that confront them.
          I am arguing that that structure is fundamentally flawed and is resulting in a disaster. Amplifying the cause of all the problems is not going to fix it.

  12. It would be interesting to see this chart with the 36 month TD separated from the shorter maturities. A priori one would expect to see a higher real after tax return for the 36 month TD than for the shorter maturities as investors should require some compensation for unanticipated inflation and other risks over this longer time horizon. For the shorter maturities one should really only expect a modest real return for delaying consumption or as a minimum preservation of purchasing power (ie. 0% real return after tax). This presumes that the depositor is not taking the banks’ credit risk as desposits are government guaranteed. If they were not then some real return should be expected for bearing credit risk.

  13. ponz 5.4%. Your marginal tax rate on average is about 33% this leaves you net in your pocket 3.6%.
    From there it depends on what you believe the real inflation figure is. On published ABS figures you are just positive. However domestic inflation is running at 5 to 6%. So you need to take your pick for yourself.

        • Agree there littleguy. Increasing prices, smaller pack sizes, overall reduction in food quality. The latter is not measured.

          Anyone who reckons inflation for the average family is 2.5% is shopping in a different place to me!

      • Ponz if you break up the ABS stats you will see domestic inflation running at 5 to 6% offset by approx negative to zero price increases in imported products. Giving a final result of 2.7 or 2.8 or whatever.

        My point in that particular case was that for the relevant 12 month period the A$ had revalued about 15%. So normally one would expect import prices to FALL say 12% or thereabouts. They didn’t. The reason was that FOB prices were rising. So we need the A$ to keep opn rising at 10 to 15% a year to offset rising import prices. If there is a recession there will be some temporary slowing in the rate of increase in FOB prices of imports. However Chinese demographics and prosperity levels ensure that the price increases will resume in the short to medium term.

        • All great points – let’s get MB bloggers (and everyone else for that matter) to factor domestic v imported inflation, FOB prices and exchange rate movements for all of their relevant modelling.

          But my original point was that a particular calculation methodology and use of aggregates is possibly distorting reality – if we are to use the RBA’s headline level of inflation applied to interest rates commonly available to everyone, then real returns aren’t necessarily negative, and people are probably making a rational ‘investment’ decision.

          • šŸ™‚ And I’ll stick to my point that over a long period these sorts of low interest rates have resulted in massive credit creation and huge debts of one form and another. Low interest rates from the RBA are not money for nothing. They do NOT help us to repay our debts. They just rearrange who is given according to his profligacy and who is screwed according to his prudence.

            People have acted rationally over a long period. I think they are acting rationally now.
            Over the longer term it hasn’t been worthwhile saving and they haven’t.
            That’s why, month after month, year after year, for 50 years we have had to continue to sell the resources and industries to whoever had some money to buy them at the time.

          • I don’t necessarily disagree with your broader thesis – I just think we have gone from a discussion about trees, to one about the forest, and now the entire eco-system.

          • I agree yes we have Ponz.
            Unfortunately it is a problem i have in limiting my observations. I find that modern economics totally unable to make the connection between interest rates and Foreign Debt and foreign ownership of our nation. Hence I get involved in this damned great web while trying to argue a small point!
            Just me!

            Thank you for your good observations. I hope it didn’t appear that I wasn’t taking notice. Your observations re inflation have been dropped into the great washpool that constitutes my messy thinking! šŸ™‚ Cheers

  14. Re the household saving ratio

    I’ve tried to find the chart from last week which purported to show little or no relationship between savings rate and interest rates. My point at the time was that a decline in the savings ratio is a cumulative effect.
    As Janet, H&H, and Prince here point out we have dis-leveraging going on with declining interest rates. Fear is driving the dis-leveraging.

    I’d make a couple of observations.

    1. The first is that I think it is a short-term fear effect. If you continue with zero to negative RAT rates the cycle will return to credit expansion. Over 50 years time frame zero to negative RAT rates gives you the sort of debt we have.

    2. I think there is a distinct difference in behavioural response according to whether you are paying down debt or increasing savings. Fear is a greater driver if you are paying down debt rather than increasing savings.
    Your effective nominal interest rate when paying down debt is of the order of 7% to 20% depending on your type of debt. The effective RAT rate then depends a lot on whether you are paying tax deductible or non-deductible interest.

    3. Each person can see the effect inflation and tax has on their savings. It’s personally disastrous. However it is also disastrous for the nation. It has meant that, as a nation, we have over-consumed for 50 years. Hence the zero to negative RAT has resulted in a nation both deeply in Foreign debt and with most of its industries and resources already sold to foreigners.

    In light of all this I’d like to hear the thinking of those who, for the past few months have championed the cause of lower interest rates from the RBA and have , on occasion, been particularly scathing of the RBA holding nominal rates a little higher than they thought ought be the case.

    Lastly i’d comment on the household saving in respect of the nation. It seems as if it is pretty much offset by the expansion in the Govt deficit. So national saving is still NEGATIVE as evidenced by the continuing CAD in the face of record ToT.

    • “In light of all this Iā€™d like to hear the thinking of those who, for the past few months have championed the cause of lower interest rates from the RBA and have , on occasion, been particularly scathing of the RBA holding nominal rates a little higher than they thought ought be the case.”

      (Listens hard … faint noise of rats scuttling in the woodwork.)