One of the surprises during last week’s State of the Union address was President Obama’s renewed focus on retirement accounts for individuals. I guess it’s not all that surprising, given the fact that Obama can’t tout any recent successes (*cough cough* Obamacare, *cough cough* the economy).
Here is how Obama presented the concept of the “myRA” to America:
Let’s do more to help Americans save for retirement. Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own. And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401ks. That’s why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: myRA. It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in. And if this Congress wants to help, work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for middle-class Americans. Offer every American access to an automatic IRA on the job, so they can save at work just like everyone in this chamber can. And since the most important investment many families make is their home, send me legislation that protects taxpayers from footing the bill for a housing crisis ever again, and keeps the dream of homeownership alive for future generations of Americans.
How can Obama start the myRA program without Congressional approval? Because he’s a dictator, right? Actually, no. All a myRA is, it turns out, is a Roth IRA that invests in United States Treasury Bonds. A Roth IRA is a retirement account that invests after-tax dollars. The principal can be withdrawn at any time and the growth of the account, if withdrawn when the account holder is 59.5 years of age or older, is also tax free. Any withdrawals from the myRA beyond the principal prior to 59.5 would result in a taxable event and a penalty.
What is Obama doing here? He is permitting people to set up Roth IRAs to invest in Treasuries because, as he put it, people don’t have pensions any more (true), Social Security isn’t enough on its own (very true), and many Americans don’t have access to 401(k)s (also true).
What follows below are just my views on the myRA program. I’m not an investment adviser and I’m not recommending any investment or trade. Do your own homework, because it’s your money, right?
So, is the myRA program a good start towards retirement savings or an “ObamAccount” that will flop?
The Pros:
1. It encourages people to save for retirement who might not save otherwise.
Whether it’s the government’s job to encourage saving for retirement or not is certainly up for debate. For the purposes of this post, I’m operating under the assumption that the current tax code will still (roughly) be in effect for a while. So, generally speaking, thrift is a good thing. The myRAs will target lower-income folks and encourage them to save. This is one way to try and reduce dependency, so I am all for this aspect of the myRA. The ability to start saving in small amounts is attractive and a benefit as well.
I am glad Obama admits that Social Security is insufficient for most folks to retire on. Social Security is also teetering on insolvency and being a Ponzi Scheme (which Obama did not say). Of course, without major structural changes, this won’t change anytime soon.
2. Savers who open up a myRA own their account.
This is a big difference when compared to Social Security “accounts.” In case you were unaware, you have no ownership interest in your Social Security “account” and Congress can decide to not pay you one cent when you become eligible for Social Security, or reduce your “benefit” or hike the retirement age, etc. You cannot transfer your Social Security benefit to another individual through a will or otherwise. A myRA, like all IRAs, are owned by the individual who opens them. They are fully transferable. This is a benefit.
3. Putting savings in United States Treasuries provides absolute principal protection (for now).
United States Treasuries are safe. By this I simply mean that if you put $10,000 into a ten-year bond, you will get your $10,000 returned to you after ten years plus a certain amount of interest. Because the US Dollar is the reserve currency (meaning it’s used all over the world and is considered a safe store of value by governments and individuals), right now there is little risk in a myRA in terms of solvency.
The Cons:
1. A saver who wants to utilize a myRA is limited.
The myRA program is limited to investments in United States Treasuries. Though Treasuries have been the best performing asset from 1980 to 2009 (yes, that’s absolutely true), will they continue to be that over the next thirty years? Who knows. Many investment professionals recommend that younger savers invest in stocks (and not bonds) while they are young, because stocks should outperform bonds over the long term. The myRA doesn’t permit that until the account has been around for 30 years or has $15,000 in it. Meanwhile, you can open up a Roth IRA for much less.
2. The risk in the myRA is interest rate risk.
While Treasuries are safe from default, the interest rate risk makes them a risk if people panic and sell them before maturity. There also is a concern that as interest rates rise, will the government be able to make those interest rate payments? I think that it will, but at the expense of other areas of spending (perhaps Social Security).
3. The government wants access to retirement accounts. Is this the first step?
It’s no secret that many in Congress want to get their hands on Americans’ retirement savings as a potential source of income for the government. There’s always talk of some sort of “confiscation,” elimination of tax benefits for 401(k)s, or “forced investment” in government bonds when financial crises occur. Also there is concern that the Consumer Protection Bureau will stick its nose into Americans’ retirement accounts and require more oversight and regulations. The inevitable result of that would be higher costs and less freedom of investment for Americans.
While outright confiscation is a pretty wild theory, some may argue that Americans didn’t see mandatory health insurance or invasive NSA spying as possibilities either. I think that eliminating tax deductions for retirement accounts that aren’t myRAs could be in the cards for Democrats in the future.
4. myRAs are simply a way to partially subsidize the national debt.
With the Federal Reserve tapering its bond purchases, what better way to make up the difference than having Americans buy bonds, right?
Well, I’m kidding here a bit, but there is no denying the fact that the myRA is investment in government debt. I suppose it’s better to have Americans buying it rather than the Chinese. There’s no shortage of U.S. government debt right now. If people want the perceived safety of government-backed debt, more power to them. I just don’t see the appeal over the long term.
Bottom line: I’m glad to see Obama talking about the retirement crisis in this country and, while myRAs may have some appeal to them depending on the person, I don’t think they will solve the issues that we have with Social Security and lack of thrift overall.
As always, free markets are better markets.
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Earnings season continues this week, and we also will be looking forward to initial claims (projected at 337k) and the all-important January jobs report (consensus is that 181k jobs were created). We’ll see if the economy rebounded after the terrible December 2013 jobs report.
Have a great week!