If you watched the State of the Union, you heard President Obama announce that he was directing Secretary of the Treasury Jack Lew to roll out a new retirement savings account plan – unhelpfully titled “MyRA,” which even the president wasn’t quite sure how to pronounce. It’s supposed to be a spin-off of the Roth IRA (individual retirement account), but “MyRA” sounds like Julia‘s less popular cousin. And this plan might sound good, but it won’t solve the problem of saving for retirement that the president is hoping it will.
The president’s announcement of the plan during the SOTU was light on details, so the Heritage Foundation has an informative Q&A article up that goes into what specifics are currently available. The bottom line is that the government sees that people are increasingly depending on Social Security as their prime source of income in their retirement years, and are hoping to get people to save more money for that time period by introducing MyRA. This program is going to be essentially what Social Security was promised to be – something you contributed to and had your name on, so that someday, when you retire, that money is there for you to use. Of course, Social Security has never worked in the way it was originally sold to the American public, and there is no “trust fund” connected to your Social Security number that you, and only you, get to use in your retirement. Social Security robbed Peter to pay Paul, and now Peter is wanting his share of the money. So now MyRA will encourage people to put their money into a guaranteed account that will never lose its initial capital, and really will have your name on it.
While in practice, this isn’t a horrible idea, it’s unlikely to make any difference at all. The Los Angeles Times is reporting that yes, while the capital investment remains intact, any returns would be minimal. The money that would go into a MyRA account would be invested into a government bond fund that federal employees currently use, and the 2012 return on investment was only 1.47%. At that rate, it’s actually slightly worse than any regular savings account at any credit union in the United States. While it will only cost $25 to start a MyRA, and only require a minimum of $5 deposits, that’s not exactly “big” savings. And if someone actually managed to save up through a MyRA plan, the Heritage Foundation says that once a MyRA hits the $15,000 mark, it would have to be transferred to a private Roth IRA – presumably because the government bond wasn’t constructed to handle anything bigger.
The president’s intent was to open up these types of savings accounts to the working poor, even though they may have access through their employers to 401(k) plans or conventional Roth IRA plans. Presumably, employers would be able to offer a MyRA option as well once the plan is enacted. The problem with MyRA is that the working poor are not thinking about saving for the future, because they are consumed with the here and now. The economy is filled with the working poor and the underemployed, and while it would be great if people put away money in some kind or any kind of savings plan, the reality is that many people don’t have an extra $5 to toss into a retirement plan. This “recovery” economy absolutely stinks for a lot of people. The cost of everything – food, gas, healthcare, you name it – has gone up. What good is it to save for later when you can barely afford to live in the now?
Yes, people should try and save for the future. 401(k) plans are successful because of employer matching programs, which encourages people to save. Roth IRA plans are a good place to put already-taxed money so it can continue to make money. But if the money people are going to be asked to put away for later would make a difference right now, they aren’t going to do it. And people who do have a little extra money to put aside are going to look for better investment returns than what a MyRA would offer. So, unless there is something that this admittedly light-on-details and not-finalized plan has that has not yet been revealed, then poor MyRA is probably going to be left largely on the treasury’s shelf without a date to the prom.