Diminished 'passive income'

Once upon a time, those who were not filthy rich but had worked hard, perhaps had a pension plan and saved diligently, could survive on their 'passive income'. Passive income here, being the interest from their personal savings accounts and/or certificates of deposit (even in regular banks).

Passive income is income earned without direct involvement in generating it. This can be derived from rental income, partnership in a business (without direct involvement in it) or income from interest payments on investments/savings.

I had many older friends who depended on their monthly or quarterly interest payments from their high-interest-bearing, long-term deposits to survive. However, in recent years, the economic landscape has changed so drastically that it is now absolutely impossible for all except the extremely rich among us to live off his or her savings (of any kind).

Although obviously necessary for our country's economic survival, the Jamaica Debt Exchange and the National Debt Exchange programmes dealt an especially heavy blow to retirees and those soon to be retired. The first two programmes directly impacted citizens who had always trusted that government paper was so safe an investment that nothing could affect the interest rates promised to them. The third debt exchange programme was directed at large financial institutions and, therefore, eventually impacted those who had saving accounts of varying kinds in them.

Even from a layman's perspective, it seems to me that our economic woes are considerably compounded because of the wide spread maintained by financial institutions and our escalating inflation rate - which is fed by the declining value of our dollar, worldwide inflation and increased taxes. A year ago it required J$87.75 to purchase US$1; now it takes J$99.55 to buy US$1, and it may slide over the J$100 mark to US$1 cliff in the near future. The inflation rate, which was 7.3 per cent in 2011 and is estimated at 7.5 to 9.5 per cent for 2012 -2013, outpaces interest earned on savings. And, the miniscule interest gotten from most savings accounts attracts a 25 per cent tax.

Depending on the institution and the amount deposited, interest rates on savings accounts vary from zero per cent (that's nought, nil, zip, nada, nothing) to 1.75 per cent. Certificates of deposit fetch between 0.75 and 4.1 per cent. However, borrowing rates (between secured and unsecured, business, personal, home and mortgages) vary from a low of 8.99 to a high of 23.75 per cent. You can see for yourself the very wide spread between lending and borrowing rates that exists.

RISKY INVESTMENT

After suffering grave disappointment, long payout delays and significant loss of anticipated/projected income from investing in government paper, many people now see it as a somewhat risky investment instead of the very safe investment that it used to be.

Jamaicans are desperate for some level of financial security. Some have turned to investing in real estate to generate rental income. The recent Cabinet approval of amendments to the Mortgage Insurers Act announced by Dr Morais Guy, minister without portfolio in the housing ministry, will reduce the down payment needed for mortgage loans and give a glimmer of hope for some.

Retirement funds alone are now inadequate. The very wide spread in banks/lending institutions negates the possibility of passive income and eradicates financial security for most of us. It leads some to desperately divert funds into small, often unsustainable businesses and even sometimes underground (illegal) 'businesses'. The pressure on most Jamaicans is extremely high; the ripple effect will soon cause an increase in all types of criminal activities.

If the banks/lending institutions were to meaningfully increase interest rates on savings and if the Government were to remove the tax on interest earned, the desperation and despair may be assuaged and the high risk of imminent increase in criminality reduced.

Garth A. Rattray is a medical doctor with a family practice. Email feedback to columns@gleanerjm.com and garthrattray@gmail.com.