MyRA: Should the Government Force Us to Save for Retirement?
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Unless you live under a rock, or have read nothing on the web over the past few weeks you’ve likely seen an article or two about the MyRA plan proposed by President Obama in the State of the Union address about a month ago.
I normally like to steer clear of politics as that’s not really the purpose of the site but was intrigued by the idea behind the concept. I believe it presents an interesting question as to what role the government plays, or rather should play in our saving for retirement. As someone who is more independently-bent part of me bristles on the inside when I hear the government wants to take an active role in another part of our lives.
That said, I’ve seen firsthand how many simply are not doing anything to save for retirement, so it seems some sort of action is needed. I’ll not really be covering the ins and outs of the MyRA, (if you’re looking for that, you can find it in my article for Personal Capital) but to look at the question of what is the role of the government in this situation.
A Look at the Numbers
Depending on who you talk to, they might say that there is a crisis when it comes to retirement preparedness. As an aside, I’m talking about what is viewed as the “traditional” retirement model where people work until somewhere in their mid 60’s and then stop working. In any event, here are some numbers in relation to retirement investing reported by the National Institute on Retirement Security (NIRS):
- 45% of households, or 38 million households, have nothing saved for retirement
- 44.5% million workers worked, as of 2011, for an employer that did not offer them access to a 401k plan for one reason or another
- The median retirement account balance is $3,000 for working-age households and a robust $12,000 for those nearing retirement age
- 92% of working households are missing their specific needed targets for retirement account balances. Translated into dollars that is a $6.8 Trillion to $14 Trillion gap. Yes, you read that right Trillion with a T
I’m generally not a doom and gloom type of individual, but these are rather grim numbers to look at. I wouldn’t imagine, on one level, that these numbers are right, but my experience tells me that they’re not far off. If in fact these numbers are right, then doesn’t it behoove us to change something? If so, at what level should that be and what role does the government play in it?
The Intent Behind the MyRA is Good
Looking at the intent behind the introduction of the MyRA by the Obama administration, it seems “good.” They want to give an avenue to those who have no access to a retirement package at their work to have one. Can we cede on that basis it has decent motives behind it? I believe we can. Just as a quick glimpse, this is what the MyRA proposes as according to WhiteHouse.gov:
- It’s intended as a starter savings account
- Individuals can start with as low of a contribution as $25 and as low as $5 per month after that
- It allows people to put away up to $15,000 into a Roth IRA-like vehicle which protects contributions from loss
- It acts much like TSPs offered to government employees and offers the same variable rate
- The MyRA is portable and must be converted to a Roth IRA once it hits the $15,000 mark
- You can make up to $129,000 per year as an individual or $191,000 as a household and still contribute
Beyond the nuts and bolts of the plan, there are a number of things I like about the MyRA:
- It gives the option to those who may not have access to retirement vehicles through their employers a way to save
- It helps raise awareness of the need to save money for retirement
- It doesn’t expose individuals to too much risk as it’s backed by government bonds
In my opinion though, the benefits largely stop there and below the surface (and not that far below it either) lurks a bigger problem.
The Problem is that it Doesn’t Go Far Enough
The major problem I see with the MyRA is that it does not go near far enough in trying to stem the tide of the supposed retirement crisis. In fact, it seems as if the government wants to take a more active role in encouraging/requiring individuals save for retirement but not taking the final step needed to do so.
The major problem I see with the MyRA is that it’s not required to be offered by employers. So, if a version of this is passed, and you work for an employer that does not give you access to a 401k type plan you very well could be in the same situation the next day. Does this solve the problem of those not saving for retirement? In a word…no.
The other major problem I see with the MyRA is that its severely limited in scope. Of course, starting to save for retirement is a good thing. Putting money into something that is guaranteed not to lose principle value is also a generally good thing. However, is a $15,000 balance going to do much in terms of retirement preparedness? Try to put out a five alarm fire with a water gun and I think you’ll get your answer pretty quickly.
Underlying both of these glaring issues is the fact that it does nothing at all about the education issue. Speaking with investors first hand, I saw many who didn’t know where to start investing for retirement, believed they couldn’t start investing with little money or didn’t know what they should invest in. This, in my opinion, is the crux of the issue and something I wish the MyRA would address.
If we believe that the education aspect is important, or think it’s another issue, at what point does the government become compelled to help try and work to begin to“cure” it? Again, I’m not one for more government involvement per se, but when does it become a necessity at some level?
The Government Already Plays Somewhat of a Role
In looking at this issue of government involvement in our retirement planning I thought I’d take a look and see if this is uncharted territory for them. It’s quite easy to see that it’s not. The first major toe dipping into government intervention in our retirement investing is that the IRS does not allow true margin trading inside your IRA accounts. Some online brokerages allow for a modified version of it and it’s something I personally take advantage of, but true margin trading isn’t allowed by the IRS. The reason behind this is that margin trading involves borrowing in order to invest (in very basic terms) and the government essentially does not want us to borrow from our retirement assets, or at the very least they don’t want to encourage it.
The other major role the government takes in our retirement investing, that I’ll cover at least, is the Required Minimum Distribution that they require starting at 70 ½ years of age in Traditional (and the like) IRAs. I don’t necessarily take issue with this, but it is government interaction at a very basic level.
All this being said, there is some precedent for government involvement in our retirement investing activity but how far should that be taken?
What is the Underlying Problem?
While I believe employer participation should be made mandatory and other options given with the MyRA that is not truly the underlying problem in relation to the retirement “crisis” we’re seeing.
In my opinion, there are three major underlying problems in relation to the retirement problems we’re seeing. Those problems are, in no particular order:
- Out of control spending by many
- Lack of education, better stated lack of financial literacy
- Out of whack priorities…which really points back to the first problem
In my completely non-scientific testing in my online brokerage days the number one reason given by the majority of people as to why they weren’t saving or saving more for retirement was debt. We talk about debt a lot in the PF blogosphere and I saw it each and every day. People were and are sacrificing their futures for a cushy present. Many would say they planned on changing, but few did over my time in the industry and the danger in that is one year becomes five and five becomes ten and so forth.
Time marches on and if we don’t make changes you’re going to wake up 15 or 20 years later seeing that you’re in the same spot. I don’t know about you, but I’d much rather make the painful changes now so I’m not robbing from my future self to the point my future self has to be a greeter at Wal-Mart. Trust me, you don’t want to see elderly me greeting people as they walk in to the third circle of hell…err I mean Wal-Mart…it won’t be pretty. 😉
The other major underlying problem is a lack of education. I saw this every day in that many individuals lacked basic investing knowledge. This is not a criticism by any means, as I believe it points back to the issue of financial literacy not being addressed in our society.
That said, we can tell people to go pick up a book and invest in some index funds until we’re blue in the faces, but the fact is that will do very little in regards to education as many don’t even know what an index fund is or understand it when the basics behind it are explained. This issue calls for honest to goodness education so that individuals become empowered to the point they can make wise investment decisions that’ll benefit their futures.
Now that I’ve taken you through a 1,700 word post on the issue of saving for retirement and the government’s role in it I see that it’s not necessarily an easy answer, but one that does require serious thought. Looking at the numbers I discussed earlier, there is no doubt a problem and one that needs to be addressed. However, at what point does that bear forth a need for government intervention? While I hate on many levels to say it’s needed, I’m also practical enough to see that something does need to change. At what cost do we need to see this change, I don’t know.
What are your thoughts? Do you believe we need to see government intervention to encourage more to actively save for retirement? What would you do to encourage change?
Photo courtesy of: RCB