MyRA Won’t Fix The Retirement Savings Crisis: Why You Should Save Independently
Did you catch President Obama’s State of the Union address and wonder whether he said “My IRA” or “Myra”? I’m leaning towards the latter. There’s a detailed article on Daily Capital titled “Will MyRA Solve The Retirement Crisis?” that you might find interesting. It reveals some startling statistics about retirement savings: nearly half of all workers don’t have access to employer-sponsored retirement plans, and about 45% of households have no retirement savings at all. The median retirement account balance is a mere $3,000 for working-age households, which barely increases to $12,000 for those nearing retirement. Only a small fraction of eligible workers contribute to an IRA.
Even if these figures are slightly off, the picture they paint is concerning. Relying solely on Social Security, which is already underfunded, won’t suffice.
The Benefits of MyRA
Before I critique MyRA, let’s acknowledge two of its benefits:
1. Guaranteed Returns: MyRA offers a safety net with principal protection guaranteed by the US government. This should encourage more people to invest, even if the returns are modest, because they won’t lose their principal amount.
2. High Income Limits for Contributions: Unlike other government-sponsored retirement plans that have low contribution limits, MyRA is accessible to households earning up to $191,000 annually, or $129,000 for single individuals. This makes it inclusive for those in higher-cost living areas like San Francisco or New York City.
However, these positives don’t make up for the program’s limitations.
The Drawbacks of MyRA
1. Limited Growth Potential: You can only accumulate up to $15,000 in your MyRA. While better than nothing, this amount won’t stretch far in retirement. Contributions can start as low as $25, and you can add as little as $5 at a time through payroll deductions. But once you hit the $15,000 cap, you must transition the funds to a ROTH IRA, which can be daunting for less experienced investors.
2. Lack of Mandate: Without a requirement for employers to offer MyRA, or for employees to participate, achieving widespread adoption is unlikely. This voluntary nature means many will opt out due to the administrative hassle or simple disinterest.
A Better Solution
Looking at Australia might offer some insights. They have a mandatory retirement savings system called Superannuation, requiring employers to contribute a portion of an employee’s salary to a retirement fund. This system is set to become even more robust, with contribution requirements increasing soon. Most funds in this system are taxed at favorable rates, encouraging saving. Unlike the US, where consumer spending is high and saving rates are low, Australia’s approach helps ensure a more secure retirement for its citizens.
The US could benefit from adopting similar mandatory savings systems. While voluntary programs like MyRA offer some benefits, they fall short of addressing the broader retirement savings deficit. To effectively tackle this crisis, a more compulsory approach, ensuring that every employer offers some type of retirement plan, would be far more effective.
