Lay aside your understandable assumption on economic matters that if O’s for it, it’s probably a bad idea. Is this, objectively, a bad idea? CNN Money and, especially, CNBC have nifty primers on the myRA ground rules. It’s an IRA aimed at the lower class, promising them a guaranteed return to entice them into parting with scarce funds they might not otherwise be willing to invest. The minimum initial investment is just 25 bucks and the choice of investments is limited to U.S. government securities so that there’s no risk of loss. (Well, sort of. More on that in a sec.) Essentially, it’s like having a Roth IRA consisting of nothing but savings bonds. If/when the account hits $15,000, it rolls over into a plain ol’ Roth IRA and you’re free to invest in the broader market from there. And although these will be offered through one’s job, it’ll cost an employer nothing to do so. The feds will handle the expense of administering the accounts in order to encourage businesses to make them available to workers. The grand idea, I believe, is simply to encourage saving for retirement even among the poor and working class, especially blacks and Latinos:
More often than not, blacks and Latinos benefit little from the tax breaks and other policy initiatives aimed at bolstering retirement security because they typically have no money to save for retirement in IRAs and other vehicles outside the workplace, according to Diane Oakley, executive director of the National Institute on Retirement Security (NIRS), which conducted the study. In addition, they are much less likely than whites to have defined-benefit pensions, particularly outside of public sector jobs.
“Those are startling findings,” Oakley said. “The typical household of color has nothing saved in a retirement account.”…
The NIRS report said that among households headed by blacks and hispanics between the ages of 55 and 64, the average retirement savings account balance was $30,000. Among whites on the verge of retirement, it was $120,000. Meanwhile, investment and human resource firms typically recommend that retirees have assets worth anywhere from eighth to 11 times their annual wages in order to adequately prepare for old age.
A key point made in that same WaPo report: As states scale back pensions and the feds start to cope with the inevitable entitlements crisis, encouraging people to save who otherwise might not makes fiscal sense. Plus, if it catches on as a “starter IRA,” it should — and actually will, per the $15,000 cap — lead eventually to broader public interest in private markets. After all, as the CNBC piece linked above points out, O’s assurance that the principal is “guaranteed” doesn’t mean that the purchasing power of your hard-earned dollar is:
The problem with that strategy is that you’ll give up a substantial return. Since the Federal Reserve collapsed interest rates to save the financial system five years ago, the return on a short-term Treasury bonds hasn’t even kept up with inflation.
With a MyRa account, your money will be invested in the Government Securities Investment Fund available to federal workers. That fund has an average annual return for the past three years of 2.24 percent. As of December, the average annual inflation rate for consumer prices over the past three years was 2.07 percent.
As some myRA holders come to realize that, they’ll look to transition relatively quickly to private investments and a regular IRA. The myRA should, in theory, simply be their entrance to the stock market. It’s a baby step, but better that than proposing a new entitlement.
Two questions, though. One: How many people will this attract, realistically? Just 24 percent of the public is confident in the stock market as place to save for retirement, according to one recent survey. That’s part of the appeal of the myRA, especially to groups that are more pro-government on balance in the first place — if another financial crisis hits, your money’s still safe — but Treasury rates are so low that it’s anyone’s guess how much encouragement a two-percent return will provide to people who are living paycheck to paycheck. Two: Related to the last point, if the goal here is to help the poor, why treat the myRA as a Roth IRA? Why not make it tax-free on both ends, like a traditional IRA when the money’s deposited and a Roth when it’s finally withdrawn in retirement? If you’re worried about too many middle-class and upper-class people using that as a tax shelter, you could impose an income cap for tax-free treatment. The lost tax revenue would likely be chump change relatively to the size of federal spending.
Update: A good point from Heritage: The myRA isn’t limited by regulation to lower-income workers. On the contrary, the income cap for a household to qualify is $191,000. Even upper-middle-class people can open one if they like. But … why would they? It’s inferior to a regular Roth IRA in every way. If you’re too risk-averse to invest in private companies, you can just use your Roth to buy a basket of government securities. The point of the myRA, I think, is simply to catch the attention of people who otherwise wouldn’t think twice about saving for retirement. The higher you go up the income ladder, the fewer of those people there are likely to be.