In the previous posting in this mercifully brief series we tried to describe the “MyRa” proposed by President Obama in his State of the Union Address. Putting the best possible light on the subject, the MyRA does not appear to have the potential to do what Mr. Obama evidently assumes it will do: encourage Americans to save for retirement.
If nothing else, the cap amount, $15,000, is insignificant to the point of meaninglessness. Even given the fact that it will be “tax free” (i.e., post-tax), few people can live off $15,000, even with interest added, for even a single year.
There is, in fact, no way that the interest rate is going to keep up with the decline in the value of the money as the government continues to flood the economy with increasingly dubious debt. The program is economic tokenism, pure and simple.
There are, in addition, some serious conceptual problems. The most obvious is that the program requires that workers reduce what even the president agrees is inadequate consumption income in order to accumulate savings for inadequate retirement income. “Forgo consumption today,” he might almost be saying, “so that you can have even less tomorrow.”
The program imposes an additional regulatory burden on employers, admittedly voluntary . . . for now. If you like not having a retirement plan, can you keep it? In any event, there is no perceived benefit to the employer. Production costs will increase with no increase in production, even if only slightly.
Then there’s the more serious problem that the program is funded by reducing consumption at a time when what is needed to stimulate the economy is increasing consumption. That’s what past savings is, after all: the excess of income over consumption.
As for the “assets” that the savings are used to purchase: government debt. To be sure, the MyRA scheme is not anywhere near as bad as the Social Security Trust Fund. Government debt is an asset to persons holding it who are not the issuing government.
It’s just not a very high quality asset, especially at this time when the present value of future tax revenues that back all government debt are getting more than a little “iffy.” No government can continue to finance on debt without a solid plan for repaying that debt that makes the debt-holders feel secure in their investment.
The Social Security Trust Fund, however, consists of bonds that have been issued by the government to replace the taxes it collected to put in the fund in the first place. In effect, the bonds in the Social Security Trust Fund are IOUs for money that the government borrowed from itself.
The trust fund is therefore solvent only if you fail to look at the financial condition of the issuer of the bonds held by the trust fund. It’s like calling yourself a millionaire because you inherited a million dollars that you put in a vault, replaced with an IOU to yourself for a million dollars, and then spent the money.
(What saves the Social Security Trust Fund, however, is that, while people are under the illusion that they own the amounts in “their” accounts, they really don’t. A careful reading of the Social Security Act reveals that, not only do we not own “our” accounts, Congress reserved the right to reduce or “adjust” benefits at any time, without having to satisfy the “takings” clause of the Constitution. All Congress has to do to stop payment of all benefits . . . and cause an armed revolt . . . is to come up with a good reason, e.g., there’s no money there. Don’t believe it? Check out the 1960 court case, Flemming v. Nestor. It’s an eye-opener.)
Getting back to the MyRA, given the low rate of return, the small cap amount, and the fact that there would be no penalties for early withdrawal, it’s highly likely most people who sign up for it will use it to accumulate savings for something, e.g., a holiday gift fund, new car, vacation, or whatever, then withdraw the money as soon as they want it, not waiting for retirement.
Bottom line here? The MyRA is a very bad idea, if only because it makes it seem as if something is being done to address a serious problem, when, in fact, nothing is being done at all.
What should be done? We’ll take a look at that in the next and final posting in this series.