In our current highly polarized political environment, it wasn’t likely that President Barack Obama would propose much that both conservatives and liberals could agree upon. But about two-thirds of the way through his State of the Union address, the president did hit upon something that everyone can agree on: Most Americans aren’t saving enough for retirement, and we should do something about it.
Analysts are eager to see the details of the president’s MyRA proposal, which seems to be a new, optional savings bond program for workers not currently offered a 401(k). Its immediate appeal to the president seems to be that this new option can be created by the Treasury Department and thus without congressional cooperation.
But the problem with inadequate retirement savings has little to do with a lack of options. Right now, anyone who doesn’t qualify for a 401(k) or 403(b) can open an IRA account, can start with as little as $25 and can invest in safe, guaranteed instruments if that’s what they want. It’s not clear how the president’s proposal would improve on that.
But there are reasons why workers don’t take advantage of existing retirement savings options, and the president’s proposal doesn’t address them. Many workers simply don’t think they have adequate income to fund additional savings, and in the current lackluster economy, they’re probably right. It’s not a coincidence that the explosion of IRA and 401(k) options happened during a period of robust economic growth in the 1980s and 1990s. There’s no substitute for real economic growth.
Other workers simply won’t save unless forced, which may offend those of us with limited-government sensibilities, but that bridge has already been crossed. Social Security is a forced savings program, but unfortunately all we get is the force — the contributions are spent, not saved, and are backed only by an off-budget promise to pay benefits at some level in the future.
The president’s MyRA won’t change this dynamic. Because it apparently will allow tax-free early withdrawals, it hardly qualifies as a retirement savings plan.
But with a few tweaks, the president’s proposal does present a tantalizing opportunity to address the retirement savings problem.
If the workers we’re trying to help are already enrolled in a forced savings program, but don’t have sufficient income to fund additional savings, let’s take that 2 percentage points of the Social Security payroll tax that we temporarily cut for 2011 and 2012 (but that was reinstated in 2013), and divert it into the MyRA.
This would result in real, additional retirement savings yet would not require any additional commitment of income by savers. The president can have his MyRA, workers will get real retirement savings, and conservatives will get at least a minimal version of the Personal Retirement Accounts, or PRAs, that we’ve been championing for 30 years.
Opponents of PRAs have always criticized the idea of putting Social Security contributions into risky investments. But the president’s new savings bond won’t be risky — it will be guaranteed by the full faith and credit of the United States, just as Social Security supposedly is today.
Proponents of PRAs want to put their contributions into a variety of instruments — not just savings bonds. But a PRA-MyRA would be a start, and it would establish accounts that could always be diversified later, with public support.
It’s true that this PRA-MyRA would marginally impact the Social Security trust fund, but all that would do is slightly advance its inevitable day of reckoning.
The overall effect of a PRA-MyRA on the federal government’s finances might be positive, as the money would still be going into government debt instruments — but now into legitimate, securitized debt instruments instead of disappearing into a sham trust fund backed by a hollow promise.
Such a PRA-MyRA would be a win for the president, for conservatives, and for bipartisanship, but most especially a win for American workers.