President Obama picked a good venue to boost the “MyRA” retirement savings accounts he touted in last night’s State of the Union address. He spoke at a U.S. Steel plant in Pennsylvania, a state where the public pension system has a $47 billion shortfall and where workers would be right to worry about running out of money as they age.
Defined-benefit plans are disappearing—they covered 35 percent of Americans in the early 1990s and only 18 percent in 2011—and defined-contribution plans such as IRAs and 401(k)s haven’t made up the difference. Too few American workers have such accounts, and most of the ones who do don’t save enough. A survey last year by the Employee Benefits Research Institute found that only 13 percent of respondents are “very confident” they will be able to live comfortably in retirement.
That dismal picture helps explain the intense interest in MyRA since Obama introduced the idea last night. “It’s a new savings bond that encourages folks to build a nest egg,” Obama said. “MyRA guarantees a decent return with no risk of losing what you put in.” Administration officials fleshed out a few of the details for reporters: The accounts are intended for workers whose employers don’t offer 401(k) accounts, and they can be started with as little as $25; contributions after that can be as low as $5, withdrawn automatically from their paychecks; and earnings on the investments—U.S. government bonds—would be tax-free, like a Roth IRA.
MyRA plans would be subject to a $15,000 maximum balance, after which they will be converted without penalty into IRAs. Those amounts are small, but the idea is to get workers who currently save nothing into the system.
In West Mifflin, Pa., Obama talked up the new plan to steelworkers. “We’re calling it MyRA,” he said. “Not IRA; MyRA.” Expected to elaborate on the concept, he didn’t offer much in the way of new details, with one exception: The president said savers would be able to withdraw their contributions “in an emergency” without paying a penalty.
After speaking, Obama signed a presidential memorandum making the MyRA official and handed it to a bundled-up Treasury Secretary Jack Lew.
To better enable Americans to save for retirement, President Obama said he would order a new “starter” savings plan called MyRA geared at low-income households. It’s a fine idea. But as with any personal savings account, you must be able to fund it for it to matter. That may be the biggest problem with the program.
Little is known about these new accounts. They would function like a Roth IRA, allowing savers to put in after-tax money that would then grow tax-free. They’d be available through your employer to anyone who does not have an individual retirement account or work for a company that offers a traditional pension or 401(k) plan. That comes to about 39 million households.
The big advantage is that you could open a MyRA with as little as $25 and make contributions of as little as $5, creating a regular savings opportunity that most low-income households have never had. Typically, plan administrators require $1,000 or more to open an account. MyRAs would also benefit from a no-fee structure that does not eat away at savings.
Your MyRA would also enjoy a government guarantee against loss of principal. The downside is that your money would be funneled into low-yielding Treasury securities and have little potential to grow enough to make a big dent in your personal retirement savings crisis—or that of the nation as a whole—until you have accumulated enough to roll it into a regular IRA where you might benefit from investments with greater growth potential.
Offering low-income households a place to save doesn’t really fix the big problem: they still must have the money and the discipline to take advantage. More than half of workers have less than $25,000 in savings and 28% has less than $1,000 in savings, reports the Employee Benefits Research Institute. And with the MyRA, you could take money out anytime without penalty. That would be awfully tempting the first time money gets tight.
The retirement savings plan represents an important first step,” says Ai-Jen Poo, director of the National Domestic Worker’s Alliance. Still, she says, “Most Americans are not able to plan for their futures because they are trying to deal with their most immediate needs, like paying their rent and keeping their lights on.”
The new accounts call to mind the so-called “catch-up” provision enabling savers past age 50 to put away an extra $5,500 in their 401(k) each year. That’s a fine idea too, but since its adoption in 2001 only the relatively well to do have used it. Let’s face it: Not many folks have an extra $5,500 lying around.
Only 13% of those eligible have made the extra contributions, according to an analysis of data provided by Fidelity Investments. That’s largely because regardless of age almost no one even contributes the maximum $17,500—already a lot of money to take out of your budget each year. For the vast majority, the extra $5,500 has proven to be irrelevant, concludes the Center for Retirement Research at Boston College.
So let’s not pretend that MyRAs will save our collective retirement dreams. They give more people more opportunity to save, and you cannot argue with that. But for these accounts to make a real difference, the folks they are meant to help most will need extraordinary willpower.
On Tuesday, millions of us watched President Obama deliver the State of the Union address. I must confess, even though I'm Canadian, I love U.S. politics, especially the State of the Union. It's the only time you get to see Republicans, Democrats, Chief Justices and top military brass all in one room listening to their commander in chief. Sure, there is a lot of showmanship but from the time of President Reagan, I never miss the State of the Union.
The theme of the State of the Union was centered around the rise of inequality. America has a huge inequality problem and it's not alone. According to an Oxfam report, the world's richest 85 people on the globe control as much wealth as the poorest half of the global population put together. In the U.S., six Walmart heirs collectively own more wealth than 42% of Americans combined. No wonder some are now warning the Davos billionaires are oblivious to the coming revolution.
But as I've previously discussed, capitalists and pension funds thrive on inequality. The very essence of capitalism is built on pillars of inequality. If you don't understand this, you don't understand the bigger picture and why the power elite will do whatever it takes to fight the specter of deflation using any means necessary.
(Make sure you read the latest from Bichler and Nitzan to understand the way the world really works. Also read David Brooks' NYT article, The Inequality Problem, but according to Jonatha Nitzan, "Brooks gives the standard neoclassical explanation: the poor are poor because they have low productivity. Make them more productive, and they will be richer, perhaps as rich as Bill Gates and Warren Buffet, and off goes the inequality. As for my opinion, this is nonsense. The issue is not productivity (which nobody, not even Brooks, has ever measured). It is power.")
Now, back to Obama's State of the Union address and his new "MyRA" plan to bolster America's retirement system. While some think the State of the Union's most despicable moment was the emotionally charged ending where President Obama saluted and praised the courage of Army ranger Cory Remsburg, I was more appalled by the glib and cryptic comments on the new retirement plan he proposed. I was actually in a state of shock, thinking to myself is this the best the "greatest nation on earth" can do to bolster its decrepit retirement system?
Folks, let me be blunt, MyRA will do absolutely nothing to bolster America's retirement system which is a miserable failure. The majority of Americans are falling through the cracks, unable to save for retirement, and for those that do manage to save something, they are living a 401(k) nightmare, anxious about retirement, or falling prey to sharks peddling loan advances to pensioners. It's the biggest scandal in modern times and yet no politician, including the president of the United States, is doing one damn thing about it.
Let me be crystal clear. The United States of America has a jobs crisis, a health crisis, an education crisis and a pension crisis. For all the red, white and blue flag waving jingoism, it's high time U.S. politicians admit this and move to implement Canadian style reforms to their education, health and pension systems (Obamacare is a joke, I know, my cousin and friends are doctors practicing in the U.S.).
More specifically, what does the U.S. need to really bolster its sprawling retirement system? It needs to adopt a universal pension plan for all Americans and have the assets managed by well-governed large public pension funds that operate at arms length from the government. This is the only surefire way to cure pension envy and make a real long-term difference to the country's retirement system.
Of course, any discussion of privatizing Social Security and moving toward a model that the Canada Pension Plan Investment Board has adopted will be met by opposition from the Left and the Right. But as I stated in my last comment on Ontario's new Technical Advisory Group, good pension policy makes for good economic policy but you must get the governance right or else don't bother implementing any reforms. Without proper governance, America's public pension problem will only get worse.
As always, I welcome comments from my readers but you're not going to change my mind on what needs to be done. I think of pensions the same way I think of universal healthcare and education. The government has a responsibility to provide for all its citizens but it must ensure these programs are run properly, effective and costs are controlled.
One of my friends sent me these comments yesterday following my latest comment:
I do not trust government to keep their hands out of the cookie jar. When healthcare costs start to rise, they will start looking for money. It is at that point when government pensions with liquid assets will be difficult to resist.
Btw, I would prefer if government would start thinking about how to fund their healthcare obligations going forward. The reality is that the baby boomers have contributed only a fraction of what will be needed to service their healthcare needs in retirement. Asking Gen X and Y to pay for both their retirement and healthcare benefits is asking too much.
I agree with his comments on healthcare costs spiraling out of control but completely disagree with his comments on the government tapping into our large public pension funds to fund these costs. I need to write a comment on governance because while the Canadian Coalition for Good Governance is good at advocating high governance standards for public companies, it hasn't done anything in terms of advancing best governance practices for public and private pension plans (and it really should).
