In a speech full of not a whole lot, one of the most interesting ideas to emerge from last night's State of the Union address had to do with old age: A new kind of savings vehicle that President Obama calls "MyRA," short for "retirement account." In his words:
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 401(k)s. That’s why, tomorrow, 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.
He's certainly right that Americans could use some help saving money; the personal savings rate has been on the decline for decades. And though the rate of decline has been leveling off, that may have to do with the fact that incomes also haven't been rising either.
The problem is even more pronounced for those on the lower end of the income spectrum, where jobs don't usually offer employer-matched 401(k) plans. The Economic Policy Institute put together this chart showing the inequality in savings by income level:
All of that amounts to a lot of people who will get to retirement age and have no way to support themselves -- and expanding Social Security doesn't appear likely anytime soon.
So what would this new plan do about the problem?
Here's the essential insight: About a decade ago, researchers started to figure out that when people are automatically enrolled in a savings plan, participation shot up by as much as 20 percent. The Pension Protection Act of 2006 allowed employers to do that on a larger scale, and now almost everyone who offers a 401(k) plan signs up employees by default.
But it didn't go far enough.
"The problem, and one of the remaining places for improvement, is that it doesn't reach everyone," said Jeffrey Brown, a finance professor at the University of Illinois' School of Business, who also worked on pension policy in the George W. Bush administration. "The single biggest question remaining to be solved is 'how do we provide better opportunities to expand the benefits of the retirement savings program for everybody?'"
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. There's only one investment option available, and it won't appreciate that quickly, but it'll be impossible to lose money. It's basically the embodiment of former Office of Information and Regulatory Affairs director Cass Sunstein's "nudge" philosophy, which pushes people by default into the choices that make most sense for them.
It also sounds a little similar to the health-care law, in that the goal is to encourage participation at the lower end of the market -- especially part-time workers, only 37 percent of whom have access to a retirement savings plan, and those working for small employers, where the number is 49 percent. Unlike the health-care law, it's entirely voluntary and doesn't depend on broad participation in order to create market power that could bring down costs.
Sounds great! But wait: What if this option prompted businesses just to drop their 401(k) plans, which often include employer contributions and other incentives to save?
Well, the administration planned for that, by capping the amount of money that can go into a MyRA -- likely around $15,000 -- before it gets rolled into a private IRA or a 401(k). That's not big enough on its own for someone to retire comfortably, or for employers to see them as a substitute. But it might help people get started on the way to something more substantial.
"The idea is to get people started on the savings path. When they reach the $15,000, at that point, that accumulation is large enough that it makes sense to invest in an IRA of your own," Brown says. "From a behavioral economic standpoint, hopefully you've reached a point where you've developed a savings habit, you're used to not having that coming into your paycheck every month."
It's not a total overhaul of the pension system, which some have called for, and which legislators like Sen. Tom Harkin (D-Iowa) are considering. And of course, savings options only help if you already have a job; the unemployed -- as well as the self-employed -- are still pretty much out of luck.
But Brown thinks it will work for some people -- or at least, not do any harm. "They've obviously been talking to small employers and private sector providers and made this as unobjectionable as possible," he said.