President Obama will use his executive authority to create a risk-free, low-return public retirement savings account system, he announced in Tuesday’s State of the Union Address, to help close the $6.6 trillion gap between what working-age Americans ought to have saved for retirement and what they have actually set aside.
This new “myRA” system, a play on the individual retirement account or IRA, taps into Treasury Department powers to give all Americans earning less than $191,000 per year the opportunity to save money for retirement through automated payroll deductions. The money will get stored in savings bonds from the U.S. Treasury Department, and the program is designed to give myRA participants a slightly better interest rate than a typical savings bond provides.
Even with that juiced interest rate, however, the bonds won’t return very much on what workers invest, and experts warn that the myRA program must not be viewed as a cure for the country’s looming retirement crisis. “It’s not intended to be a long-term solution,” Center for American Progress (CAP) retirement expert Joe Valenti told ThinkProgress, but rather “a kick-starter to get individuals who may not have any savings or may not have been interested in saving before to get started with a simple, accessible vehicle, and then move on to something else.” Workers who are already within a decade or so of retirement age but do not have substantial savings will get a big boost from the myRA system, but younger workers who have more time until retirement should be investing more aggressively. “But the proposal doesn’t stand as a retirement platform on its own,” according to a column Valenti co-authored with CAP’s David Madland, and “Congress can and should consider bolder proposals for retirement security.”
If policymakers want to focus on the kinds of private retirement accounts that myRA seeks to replicate, there are a variety of proposals out there to improve that system. “Congress has two routes that it could follow,” Valenti said. “One is the SAFE account model (a CAP proposal called Secure, Accessible, Flexible and Efficient Retirement Plans) which would really improve the state of employer retirement plans by making them portable and eliminating a lot of the fees and risk that workers face,” and the other is “cleaning up the tax system” and ditching tax breaks that benefit wealthy savers. Combined with the new accessibility of the myRA savings kick-starter accounts, SAFE plans and changes to the tax code could do much more to close the retirement savings gap than myRA can on its own.
An even bolder idea, however, is to simply expand Social Security, as Sen. Elizabeth Warren (D-MA) and others have suggested, rather than seeking to cut the country’s most successful anti-poverty program in the name of deficit reduction.
Still, Obama’s idea is “a valuable first step,” Valenti and Madland write, given the scope of America’s retirement savings problem. Two thirds of American workers are accumulating debt faster than retirement savings. Many do not have any retirement savings — a problem that is substantially more common for black and latino Americans than for white working people. Even when an employer does offer retirement savings accounts that use tax advantages to lure workers to set money aside for their future security, those accounts tend to scrape much of their investment returns off into the pockets of financial advisers. That fee structure not only leaves people with less in their retirement accounts, it also drives economic inequality.