President Obama’s plan to create retirement accounts for workers who do not have that option on the job represents a tiny first step toward addressing the increasingly urgent problem of Americans who do not save enough for old age, analysts say.
Obama signed an executive order Wednesday directing the Treasury Department to create MyRA, a government-guaranteed savings account that pays minimal interest rates and is aimed at the nearly half of American workers whose employers do not offer retirement plans.
“This is an important but modest step,” said Karen Friedman, executive vice president of the Pension Rights Center, a nonprofit group that promotes retirement security. “It is a common-sense approach to making voluntary savings easy and safe.”
Still, the plan marks sharply scaled-back White House ambitions for bolstering retirement security for the growing number of working Americans at risk of downward mobility when they leave the workforce.
In the past, the president has proposed to compel employers who do not offer retirement plans to automatically enroll workers in individual retirement accounts, unless the workers decline. Obama reiterated that call in his State of the Union address Tuesday night. He has also previously asked lawmakers to expand the Saver’s Credit, a special tax break to give low-income Americans an additional incentive to save for retirement.
But in a Congress divided by Obama’s health-care law, the idea of another employer mandate has gone nowhere. Meanwhile, his call for a more generous tax break to help Americans save has run into a wall of opposition amid fears that it would add to the nation’s budget deficit.
Concern about eroding retirement security is growing in Congress and in state legislatures across the country. Sen. Tom Harkin (D-Iowa) has been working on a new retirement plan that combines elements of traditional pensions — including lifetime benefits and pooled, professional management — with the portability and ease for employers of a 401(k). Harkin’s plan, which calls for the accounts to be privately managed with oversight by the Labor Department, will be officially unveiled Thursday but faces steep hurdles in Congress.
Meanwhile, about a half-dozen states, including California, are looking into establishing retirement plans for those who lack coverage on the job.
In his speech Tuesday, Obama also took aim at tax breaks for 401 (k) accounts that he said do more to subsidize retirement saving by upper-middle-class and wealthy Americans than by those who are struggling. He urged Congress to “work with me to fix an upside-down tax code,” a line that triggered strong blowback from retirement experts.
“In reality, households making more than $200,000 only get 17 percent of the tax benefits from 401(k) plans, while middle-income households enjoy the majority of such tax benefits,” said Brian Graff, executive director of the American Society of Pension Professionals & Actuaries.
Obama described MyRA as “a new savings bond that encourages folks to build a nest egg.” Treasury Department officials said they plan to have a pilot program in place by the end of the year. The MyRA accounts would be structured like Roth IRAs, with interest earnings accruing tax-free, assuming they are untouched until workers reach 591 / 2 years of age.
Employers would not be required to take part. But given that they would incur no costs and only minor administrative hassles, Treasury Department officials said they hoped millions of employers and workers would eventually sign on.
The fact that sign-up would be convenient, contributions would be automatic through payroll deduction and the government would cover administrative fees should make the program all the more attractive, they argued.
Others were not so sure.
“I do not see this program as filling any gap,” said Lance Roberts, chief executive of STA Wealth Management, a Houston-based money manager. “If you look at all the options out there — IRAs, Roth IRAs, savings bonds — the reality is that there are plenty of savings vehicles out there. Having vehicles to save money is not the problem. The problem is having money to save.”
MyRA account holders would have to invest in a fund pegged to government bonds, which recently were offering total returns of just 1.47 percent. They could start saving with a $25 investment and add as little as $5 a month to their accounts.
They could keep their account even as they changed jobs, unless the balance reached $15,000, when the cash would have to be rolled over into a privately run account. The money workers contribute to the accounts would be guaranteed by the federal government.
Account holders would be able to make hardship withdrawals without facing significant tax penalties. And while the plan is aimed at low-income people, anyone in a household earning up to $191,000 a year is eligible to invest.
“The plan has the advantage that it helps people who do not have the ability right now to save easily through payroll deduction,” said David C. John, a senior policy advisor at AARP who added that it steers people around financial institutions that discourage investors with small accounts. “It helps get people into the habit of saving.”
But others said Obama’s new initiative is so modest that it does nothing to address the larger problem of eroding retirement security for Americans.
“At best, it is a distraction from the bigger issue of what we need to do to shore up retirement,” said Monique Morrissey, an economist at the Economic Policy Institute. “It is a very, very modest tweak, and it is not likely to have much of a substantive impact.”