Economics 101: The myRA accounts

George Bush wanted to partially privatize Social Security, by allowing people younger than 55 to divert 2 percentage points of the 6.2% taken in FICA taxes, and put it in private accounts, and he was absolutely excoriated by the Democrats. This plan wouldn’t touch that 6.2%, but “allow” you to pay even more into the federal government, to get that private account.

From CNNMoney:

What you need to know about Obama’s ‘myRA’ retirement accounts
By Melanie Hicken | January 30, 2014: 4:11 PM ET

In his State of the Union address, President Obama announced plans to create a new ‘myRA’ retirement account aimed at helping millions of Americans to start building a nest egg.

On Wednesday, Obama signed a presidential memo directing the Department of Treasury to create the government-backed retirement accounts.

Here’s a look at how myRAs will work, according to the White House:

Who can open a myRA? The accounts are targeted at the millions of low- and middle-income Americans who don’t have access to employer-sponsored retirement plans. That includes roughly half of all workers and 75% of part-time workers.

The White House says it will “aggressively” encourage employers to offer the program, noting that they won’t have to administer or contribute to the accounts. myRAs will initially be offered through a pilot program to workers whose employers sign on by the end of the year.

Once the program reaches full implementation, anyone who has direct deposit for their paycheck will be eligible to sign up, Treasury said.

More at the link. The main points:

  • All workers may invest in the accounts, as long as they are paid via direct deposit, including those who already have an employer-provided 401(k) plan, as long as their household income falls below $191,000 a year.
  • The account will function as a Roth IRA rather than a traditional IRA. This means that participants will not be able to deduct the savings from their income at tax time, but will may no taxes on the principle or investment earnings upon qualified withdrawal. Anyone who withdraws the interest earned in the account before age 59½ will get hit with taxes and a possible penalty, just like a Roth IRA.
  • The myRA accounts will solely invest in government savings bonds. They will also be backed by the U.S. government, meaning that savers can never lose their principal investment.
  • Unlike IRAs at private investment firms or banks, the myRA accounts will have no administrative fees.
  • Once the account reaches $15,000, it must be transferred to a private Roth IRA; it can be transferred at any time before it reaches the threshold.

Again, more at the link.

This is not a terrible proposal, in that it could encourage savings, but it isn’t a great one, either. Workers can open such accounts with a very minimal investment, just $25, and contribute as little as $5 a week. For workers who can only save at the very lowest levels, the lack of administrative fees could outweigh the low rates of return.

However, your Editor, who has exactly zero trust for President Obama’s motives, notes that the money the workers would save goes directly to the United States Treasury, for investment in government securities, and that means the money would be doing exactly one thing: helping to finance the deficit! More, if the myRA were to result in significant worker investment, it could reduce the amount of money that the government has to borrow on the open market to a level which might depress interest rates a bit . . . which would have the effect of lowering the rate of return workers would see in their myRAs! The more successful the program is in attracting workers to sign up, the less successful the workers will be in realizing returns on investment. That said, your Editor doubts that it will be successful enough to make any appreciable dent in interest rates.

Since the program will be restricted to those workers who have direct deposit for their paychecks,1 everyone who could participate in the program already has his paycheck going to a bank, and that means everyone who could participate could also simply start an IRA, Roth or traditional, at the bank he used, and have a far wider choice of investment options. Since the myRA could be transferred to a private IRA at any time, it could make sense for someone who just can’t come up with a decent amount of money for an initial opening of the account, but when I checked with the bank I use, the website stated that there was no minimum amount required to open a Roth IRA; other banks could be different.

Despite my lack of trust for anything that comes from the Obama Administration, I don’t see anything bad enough in this proposal to oppose it, but I also don’t see enough good in it to make it worthwhile. The myRA might help a few people, and I’m perfectly willing to let other people decide how they wish to invest their money, but it really seems like an almost nothing program to me.
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  1. This seems like a strange restriction to me; the federal government does not have to have direct deposit on paychecks to collect Social Security taxes.

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