Tag Archives: MyRA

MyRA – The Good and the Bad

During his State of the Union address in January, President Obama introduced  the “myRA.”  A myRA is a retirement savings account targeted primarily towards low income-workers without access to a work-sponsored 401K account.  According to the White House, the ultimate goal of the myRA is to foster retirement savings across all income levels.  Given that only 57% of American save for retirement, and that only 49% of all works have access to sponsored retirement savings (like a 401K), this is a very caring goal.  Given that social security is expected to go insolvent by 2033, this is a very practical goal as well.  That said, the nuances of the myRA are extremely limiting, making it a half-hearted attempt to fix a very important problem.

Before addressing the negative aspects of a myRA, it is important to understand the benefits.  Most importantly, the myRA account offers a way for low-income workers to develop a habit for savings.  The myRA account is essentially a modified Roth IRA; deposits are made after-taxes, and earnings grow tax-free.  Unlike a Roth IRA however, myRA’s have very few barriers to entry: the minimum balance to open a myRA savings account is only $25, and additional deposits can be made in increments as small as $5.  Furthermore, there are no fees associated with a myRA account.  Finally, for those risk-averse investors, the principal is guaranteed (much like a traditional savings account).  All of these qualities make the myRA an attractive savings vehicle.  Given its ease of use, I agree with Obama that, given the write promotion campaign, a myRA can encourage better savings habits among low-income workers.

That said, it is important to understand the difference between savings literacy and investment literacy.  It is one thing to save money for retirement.  It is another thing to wisely invest this savings so that it earns a reasonable rate of return.  While the myRA program may foster savings literacy, numerous restrictions greatly inhibit its ability to develop good investment literacy.

The two most important of these restrictions are a savings cap and a requirement investment asset.  Firstly, all myRA accounts are limited to $15,000.  If someone’s myRA account has a value that exceeds $15,000, the excess must be rolled over into a Roth IRA (given that the principal is guaranteed, this makes logical sense; the FDIC can only afford to insure so much money).  While $15,000 is a good start, it is, under almost no circumstances, a sufficient nest egg.  It is my fear that this cap will signal to myRA investors (who will  likely be rather savings illiterate), that the $15,000 is a sufficient quantity of retirement savings.  Unless the White House develops an excellent transitions program to help individuals roll over their myRA to an IRA, this cap will likely result in many grossly underfunded retirement accounts.

The second and most important myRA restriction is its lack of investment options.  Whereas a Roth IRA allows individuals to invest in nearly any security, myRA’s can only be invested in a US government savings bond called the Government Securities Investment Fund (more informally referred to as the “G Fund”).  Since 2003, the G Fund has offered an annual, nominal rate or return of 3.61%.  During that same time frame, inflation has averaged 2.5%.  This means that the real rate of return of the G Fund has barely topped 1% in the last decade.  While this return is higher than a traditional savings account, it is well below what a standard index fund (ie: Russell 2000 or S&P 500) is capable of earning.  I understand that Obama wants to protect investors from making foolish investment decisions (like buying all penny stocks).  But by limiting investment to the G Fund, I fear that myRA’s will foster too much risk aversion and prevent investors from growing their nest eggs at a reasonable rate.

Ultimately, the myRA is a step on the right direction.  It is about time that the US Government address private savings in order to supplement social security.  That said, it is important to realize that savings literacy and investment literacy are not the same thing.  Thus while the myRA has the potential to foster better savings habits across low income levels, it seems to have very little potential to foster intelligent investment habits.  I believe that a modification to the current social security tax would accomplish this goal much more efficiently (see my post: “Should Social Security Switch to a Defined Contribution Plan?”).  Whatever happens though, it is crucial that policymakers begin to address savings and investment literacy before social security becomes insolvent.

Minimum Wage Increase Alternate Agenda?

Watching the State of the Union Address from earlier this week and pick through the ideas again, I thought that the things the president suggested and ideas he wanted to implement were all good on face level. I think that both the left and the right want to tackle immigration and both the right and the left would like to see progress be made on the issue of inequality– even if they have different ways of combatting it.

The main point of the address I would like to focus on, especially in a time where the Fed is taking its foot off of the gas with an enormous balance sheet, is the institution of a program called MyRA. Not all of the details have been released by the treasury just yet but according to the WSJ the accounts will be government sponsored Roth IRA’s that target those workers making less than $191k per year and can make contributions as small as 5 to 10$ per month. (WSJ) I am going to make multiple points here so stick with me.

While in theory this IRA program seems like a great idea, I honestly am all for the financial education of those who may not realize that they need to be saving until it is in fact, too late. But could there be something of an alternate agenda here? According to BLS approximately 3.6 million workers earned at or below the federal minimum wage level of $7.25 in 2012. This would be some 3.6 million people who would be targeted to save this money in the MyRA program as well as the myriad of people earning under the $191k threshold. All of this money goes into a “government bond fund” (coincidentally at the same time the fed needs to start thinking about unwinding its government bond ridden balance sheet) that receives a guaranteed percentage return each year. The WSJ points out that Mr. Obama can fund this program through the treasury appropriated funds which are not meant for this type of operation, but Mr. Obama can also increase the funding and thus have the ability to increase the guaranteed percentage return and create his own unique welfare system. (WSJ)

Now I will be the first to say that this article goes out on a bit of a limb and there is obviously the chance that the program will never be used in such a manner. Also I would like to stress once again that I am completely for financial literacy and the push to save early and often in ones life. But, I am also one to be realistic, and I think that looking at another program in which people put money in now, with the hopes of receiving monthly sums later in life (Social Security) is all one needs to do to lose the rosy feeling you get when thinking about all of the potential benefits that come with a program like MyRA.

I also think that the president’s clear scorn for congress, while maybe warranted, as well as his outright admittance that he will try and “go it alone” and get around them in whatever way that he can is a somewhat disturbing show from our chief executive. While I have every belief that playing in Washington may take years off of one’s life (figuratively speaking of course) I think that the person assuming that position needs to stay true to the ideals that they took an oath to uphold. One cannot come to any conclusions about these programs right now and I do hope that whatever the outcome is, it is a positive one, but for the moment my hopes are not too high.