By Gerald E. Scorse, Progressive Charlestown guest
columnist
President Obama’s legacy will scarcely mention
retirement savings accounts, but he did point the way to a promising option:
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.
But cheer up. The Obama creation does have some
positives, starting with the cleverest name yet. It’s called myRA, shorthand
for “my Retirement Account.” A lot snappier than 401(k) or 403(b).
Let’s see 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 monies 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 S&P 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 pre-tax
dollars, the same as contributions to 401(k)s, regular IRAs, and other
retirement plans. Instead, myRAs were set up as Roth accounts and require
contributions in post-tax dollars. At first glance 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 accounts never
pay taxes on capital gains, costing the Treasury untold billions in foregone
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 The
Motley Fool touted myRA as “the best place” for short-term and emergency
savings. Yields may be low, but they far exceed those of bank savings accounts
or CDs. In addition, the principal can be withdrawn anytime. 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 those who need help the most. It’s not good when
the help turns out to be so little.
Gerald
E. Scorse helped pass the bill requiring basis reporting of capital gains. He
writes articles on taxes. © 2014 Gerald E. Scorse