MyRA Is Laudable, But Won't Produce Grand Returns

One of the more interesting policy proposals from President Obama’s sixth State of the Union address was the announcement of an executive order directing the Treasury Department to create MyRA—a government backed savings account. The details of MyRA are pretty straight forward: the plan offers American workers a savings account with low interest rates for whose employers do not offer traditional retirement savings plans.

Here’s the skinny via Nick Summers at Bloomberg Businessweek: "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offer 401(k) accounts, and they can be started with as little as $25; contributions after that can be as low as $5, withdrawn automatically from their paychecks; and earnings on the investments—U.S. government bonds—would be tax-free, like a Roth IRA."

And Lydia DePillis in the Washington Post notes, "The MyRA option would create an cheaper way for smaller employers to enroll their workers in some sort of plan, by taking an automatic payroll deduction that goes into a Roth IRA-style, government-backed account with the employee's name on it."

The plan has its advantages in encouraging meaningful long-term savings for retirement. The proposal is indeed ambitious and well-intentioned, but unlikely to significantly boost overall retirement savings of American workers. As a financial product targeted at lower- to moderate-income individuals, the incentives—other than retirement savings and protection of the principal balance—are weak. Since MyRA is a Roth plan, the contributions are not tax-deductible, which eliminates some incentives for savings.

Last year, we released a report detailing the contributions of the financial services industry to the U.S. retirement savings system. Overall, the current U.S. retirement savings system has proven to be successful, with participation and retirement assets both rising steadily over time. While the overall savings rate has dropped, more than two-thirds of American households have accumulated $19.2 trillion in retirement assets. Presently, the U.S. currently lags many OECD countries in terms of level of savings in private retirement savings plans (adjusted by country GDP):

Private Retirement Savings OECD 2011.png

President Obama’s plan may achieve success by helping ordinary Americans start a meaningful savings account, but it’s not going to produce a sea change of in the way that Americans plan for retirement. It may work in the short-run to prop up participation in general retirement savings, but over the long-term there must be meaningful policy changes to induce increases in general retirement savings rates. The U.S. retirement savings system has proven to work. Policymakers, plan sponsors, and service providers should work together to implement additional measures to strengthen this system beyond the small steps of myRA. These successes should be built upon with policies that further incentivize retirement savings for all economic and demographic groups. Ensuring America's small businesses are able to offer plans that are cost-effective is of great importance.