President Obama’s legacy will probably not include retirement savings accounts, but he did point the way to a promising option this year: a government-sponsored account, aimed at the millions of workers without access to an employer plan. As with so much else in his presidency, it’s an example of high hopes trumped by mediocre execution.
The Obama creation does have some positives, starting with the clever name. It’s called myRA, shorthand for “my Retirement Account.” A lot snappier than 401(k) or 403(b).
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Here’s what’s good about myRA, what’s not so good and how it could have been so much better — for retirees, for the Treasury, for the country.
Statistics show that roughly half of all workers, predominantly low earners, have yet to set aside a single retirement dollar. Turning those non-savers into savers is sound policy. Where employers make myRA available, workers will be able to open an account with a minimum deposit of $25 and automatic deductions as low as $5 per payday. All money will be invested in Treasury bonds. The accounts have no fees and guarantee total safety of principal and interest. MyRAs will close out after 30 years or at $15,000 (whichever comes first) and convert to private-sector holdings.
Now for the many shortcomings of an account the Treasury Department describes, correctly, as “simple, safe and affordable.”
The first problem is that guaranteed securities generate small returns, especially these days. Yields on Treasury paper have been sitting at or near historic lows ever since the financial meltdown. Of course, rates will eventually rise; so too will inflation, leaving real returns more or less permanently negligible.
MyRAs, scheduled to roll out by the end of 2014, could have been far more rewarding. Contributions could have gone into an index fund, tied to a broad market measure like the Standard & Poor’s 500 or the total market. The risk could have been neutralized by guaranteeing both the principal and an inflation-matching return. Such a guarantee might never have to be invoked, and it wouldn’t cost that much even if it were. The accounts are geared to small savers, and that keeps any downside small as well.
Contributions to myRAs could have been in pretax dollars, as with 401(k)s, regular IRAs and other retirement plans. Instead, myRAs were set up as Roth accounts and require contributions in post-tax dollars. This appears to raise federal revenue — for budget purposes, the upfront taxes count as a fiscal plus. In fact, Roths guarantee federal red ink far into the future: The account holders never pay taxes on capital gains, costing the Treasury untold billions in forgone revenue. Other retirement accounts ultimately pay back Uncle Sam with taxable withdrawals; with Roths, the payback never comes.
One last problem. Given the target audience, the income eligibility limits are bizarrely high. The plan is open to singles making up to $129,000 and couples making $191,000. Why would people with incomes like that choose a myRA? The financial services company Motley Fool touted myRAs as “the best place” for short-term and emergency savings. Yields may be low, but they exceed those of bank savings accounts or certificates of deposit. In addition, the principal can be withdrawn any time. That’s shrewd thinking, but it has little to do with retirement. It also suggests that myRAs could easily be gamed by the relatively well-off.
It’s good for government to help workers save for retirement, all the more so for those who need help the most. It’s not good when the help turns out to be so little or so light.