President Barack Obama announced this week that he would establish a program to help low-income earners save for retirement.
But the new "starter" savings program -- called "My Retirement Account” (myRa), for "my Individual Retirement Account” (IRA) -- has left a few analysts skeptical.
“His proposal might do some good -- not by helping workers, most of whom are unlikely to take advantage of it, but by spurring a discussion about how to fix a broken retirement system,” the Bloomberg editorial board said.
Others are more apprehensive.
"It's a trap. It will make your savings highly visible to the government, very vulnerable to future special taxes and it drives investments in the direction of financing the government with your savings, rather than the productive private sector," the Economic Policy Journal said after the president unveiled the plan. "That's what myRA is all about."
The program is aimed at Americans who lack the start-up funds required for many commercial IRAs.
"Starting with as little as $25, savers are expected to invest a little each month in Treasury bonds and then convert the accounts into traditional IRAs once the savings grow," the Associated Press reported. "The president said that he wants all workers to be automatically enrolled in IRAs unless they specifically opt out. Under one scenario, monthly paycheck deductions would be invested in bonds unless workers choose another option."
But as the Bloomberg editorial board said, participation in the new program will probably be far below expectations -- unless people are forced into it.
“Without compulsion or inducements, participation in MyRAs is likely to be small. Fewer than one in 10 workers who are eligible to contribute to existing Individual Retirement Accounts bother to do so,” the board said.
Further, it's important to note that the White House technically does not need congressional approval to start the program. According to Bloomberg, this is both a good thing and a bad thing.
"It’s good because it means something will happen; it’s bad because without legislation, the government can’t make employers offer the plans or tell workers they’re covered unless they choose not to be," the editorial board said.
Households earning approximately $191,000 annually can deduct money from their paychecks and put it into a retirement fund that pays roughly the same interest rate as retirement funds available to federal workers.
"Savers would contribute after-tax dollars into the accounts, starting with as little as $25. They could opt for contributions as low as $5 a paycheck," the AP adds. "New retirement accounts being set up by the Treasury Department would target workers whose employers don't offer retirement benefits or who haven't started saving yet for old age. Treasury expects to have a pilot program working by the end of the year."
Unsurprisingly, Zero Hedge has a very dim view of the initiative: “[S]ince it offers ‘guaranteed return and no risk’ we now know where all the Fed's bond trades will go to work once [quantitative easing] ends.”
But here’s the thing: The president was a little more careful with his words when he explained program’s “guarantees.”
“Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own. And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401ks,” the president said during his State of the Union address Tuesday.
“I will direct the Treasury to create a new way for working Americans to start their own retirement savings: myRA. It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in,” he added. “Offer every American access to an automatic IRA on the job, so they can save at work just like everyone in this chamber can.”
For now, unless tweaks are made to the program, workers who want to open a MyRA account must first make sure their employers agree to participate.
The White House admitted Wednesday that no businesses have actually committed to enrolling in the program. Further, Treasury Secretary Jacob Lew was unable to say how many Americans are expected to open MyRA accounts.
"We think this fills a space that, very importantly, we can do by our own authority," Lew said.
Still, the White House said the program will cost practically noting and remains optimistic businesses will sign on to participate.
“These new accounts will open up access to tax-advantaged retirement savings vehicles that many people do not currently have access to because of cost-prohibitive barriers,” Jamie Hopkins, a professor in the retirement income program at the American College, told The New York Times, adding that the maximum amount people can save -- roughly $15,000 -- is fairly limited. “This is relatively small and for most people won’t make a significant impact on their retirement preparedness all by itself.”
“[T]his will not solve the retirement income shortfall that exists in the U.S.,” he said, adding that it may still be “a step in the right direction.”
But because the program relies on paycheck deductions, businesses that don't use automatic payroll systems will be excluded unless and until the administration develops a new system for them to participate, according to the AP. This raises obvious questions about how far the White House will go to adjust the program without congressional approval.
"I could do more with Congress, but I'm not going to not do anything without Congress," Obama told a crowd of workers Wednesday at a steel plant in Pennsylvania.
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This post has been updated.