The nation's looming retirement crisis was entirely predictable. Stagnant wages, skyrocketing costs for education and for health care along with the great recession have all combined to make saving for retirement a pipe dream for most low and middle income people. Private pensions are pretty much a thing of the past. Most of us, two-thirds in fact, are accumulating debt faster than we're accumulating retirement savings. The great recession tanked plenty of 401(K)s (which many workers don't have, anyway), and erased the home equity many near-retirees were counting on for a cushion. Retirement could be another pipe dream for a whole lot of baby boomers and their children.
So what does President Obama's new proposal for "Securing a Dignified Retirement for All Americans", simply known as MyRA, do for us? Not enough.
Here's the basics of it. Low and middle income earners who make less than $191,000 a year, and whose employers don't offer traditional defined-contribution plans like 401(k)s would be able to invest in the portable account—it can be taken from employer to employer. Investment is through payroll deductions of as little as $5 a paycheck, after an initial $25 investment. The money goes into a government-backed bond pegged to the Government Securities Investment Fund offered to federal employees through the government's Thrift Savings Plan, a retirement program. That's a low-risk, low-return fund that last year yielded 1.47 percent and has averaged 2.24 percent over the last three years. It tends to hover right around the rate of inflation, so the returns aren't going to be great. But these bonds are protected from losing face value, and won't be subject to market losses, so the account balance cannot go down. There are no tax penalties for withdrawals from the fund. After a fund reaches $15,000, it would be rolled over into a conventional Individual Investment Account, an IRA. That's where the financial services industry, which makes a good bit of money off of managing our private retirement funds, kicks in.
For analysis of the plan, go below the fold.
The IRA rollover part is where folks like those at the Economic Policy Institute see the bad news in what is otherwise a modest, but somewhat helpful program. Here's EPI's Monique Morrisey:
The bad news is that once accounts reach a low $15,000 threshold, they would have to be rolled over to an IRA. Though some IRAs provide reasonable investment options at a reasonable cost, most do not. The president’s plan may serve to funnel savings into these accounts without really addressing the failures of the current system.It does help keep the financial services industry happy, as they'll be able to gobble up those savings once they've amounted to anything. If they end up amounting to anything. There's no disincentive for people to withdraw funds as they need to. But there's also the more basic problem that, especially for the really low-income workers the plan is intended to help, having anything left over for savings at all is a big hurdle.
There are much better ways to shore up retirement security for low and middle income workers. First and foremost, recognize the reality that Social Security isn't a supplement for most people any more, it's the majority of what they've got to live on. Expanding Social Security, making it more generous and making cost of living adjustments actually meet increasing costs of the things seniors spend most of their money on, is one good solution. Sen. Tom Harkin has another, his Universal, Secure and Adaptable Retirement Funds Act, which would supplement IRAs and 401(K)s a safe fund with higher returns than the MyRA.
President Obama's MyRA isn't a bad idea, but it's not a solution either, and it shouldn't serve as a distraction from the need to both strengthen and expand Social Security and other safe retirement savings options. Instead of a solution, it should be viewed as a starting point for talking about the real ways we can divert the looming retirement crisis.