MyRA: Understanding President Obama's Retirement Savings Plan
Originally published on Mon February 3, 2014 1:23 pm
MICHEL MARTIN, HOST:
This is TELL ME MORE from NPR News. I'm Michel Martin. We'd like to start the week talking about a subject that might be on your mind as you start preparing your taxes and you're pull out those bank statements. We want to talk about planning for retirement. Almost half of households in this country don't have enough savings to cover their retirement or even unexpected emergencies, that according to a new report from a group called the Corporation for Enterprise Development.
That's a nonprofit that does research and advocates for policies focused on economic security for low and moderate-income Americans. But other studies have shown similar findings. In his State of the Union address last week, President Obama advanced an idea to address that problem. He proposed a plan to help people open what he calls MyRA accounts.
(SOUNDBITE OF STATE OF THE UNION)
PRESIDENT BARACK OBAMA: It's a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in. And if this Congress wants to help, work with me.
MARTIN: The president has already ordered the Treasury Department to start the MyRA plans. We wanted to know more about them, so we've called Rana Foroohar. She is the assistant managing editor in charge of economics and business at Time magazine, with us once again from New York City. Rana, welcome back. Thanks for joining us.
RANA FOROOHAR: Thanks for having me.
MARTIN: Also joining us once again is NPR senior business editor Marilyn Geewax, here with us in Washington, D.C. Marilyn, welcome back to you. Thank you for coming as well.
MARILYN GEEWAX, BYLINE: Hi, Michel.
MARTIN: So, Rana, let me start with you. We mentioned that almost half of American households - 44 percent - don't have enough savings, as we said, for an unexpected emergency, let alone for retirement. Why do we think that is?
FOROOHAR: Well, I think, frankly, the majority of Americans aren't making enough money, particularly in a time when unemployment is still at historic highs, in order to save enough for retirement. And I think that the MyRA program really underscores that we have a retirement crisis in this country. So just to give a little more data, it's not just that half of all Americans don't have enough money for retirement. Half of all Americans have less than $25,000 in savings. You know, even the boomers that are getting closer and closer to retirement who have presumably had decades to save, only a small fraction have over a $100,000 to fund their retirement.
You know, that certainly does not keep you going more than a few years. So even though MyRA is a great little idea, it is a little idea. It's not a silver bullet for the fact that 40 million Americans have had no access to any kind of formal pension or 401(k) program.
MARTIN: OK. We want to hear more about that in a minute. Marilyn, do you want to add to that? I mean, there have been a number of groups that have studied this question recently. I think that Senator Tom Harkin of Iowa was part of a group that kind of worked on this issue. What do you have to say about that?
GEEWAX: People have studied this an awful lot. And, yes, on the one hand, a big problem is that people - an awful lot of people just don't have money. They feel like they can't set aside some extra money every week. But a lot of it is just habit. We are so - it's easy to live in the moment. It's pretty hard to envision yourself 30, 40 years down the road. But that's exactly what we do need to do. You have to be able to, in your 20s and 30s, start thinking about what life would be like in your 60s, 70s and beyond that.
MARTIN: So how does the MyRA idea address this? What is it - endeavor to do, create a new habit, Marilyn?
GEEWAX: Yes, exactly. Rana is certainly right that this is not a complete solution by any means, but you have to think of it as a starter kit for retirement. The idea of it is right now an awful lot of employers do not offer workers any set of retirement savings vehicle. That is about half of people don't have access to what we call those 401(k)s, and the problem is it's people who really most need to save are the half that don't have access to an employer-sponsored retirement plan. It's part-time workers, people who maybe work for very small businesses. They need help getting started with this habit of saving and thinking about what life will will be like decades from now.
MARTIN: What does this do, though, that the existent market doesn't do? I mean, you could walk into a Fidelity - or any other office, I'm not offering brand recommendations - but, I mean, there are a lot of places that are kind of easy to access that you could just walk in and open an account for yourself.
MARTIN: What does this do that those plans don't do now? Can you open them with less money?
MARTIN: Is there a tax advantage? What happens?
GEEWAX: That's it. When you're a small saver, you can get hit with so many fees it's unbelievable. I mean, I have my own IRA and they charge $40 a year just to have it, just to exist. Well, if you're a small, small saver, you know, you don't want to pay those fees. And you're not getting much interest being paid if you do safe investments. So this kind of addresses a lot of different problems. For one thing, there are no fees associated with it. Another, you can do it on really small amounts. You can open for $25, get it started. You can put as little as $5 a week into it. It's a way for really small people - or small savers - to not get hit with fees, get a little bit of interest that's maybe a little bit ahead of inflation.
And it's guaranteed, you won't lose your principal. The government will stand behind it so you don't have to worry that you're going to lose your money. So that's pretty appealing. And then the other thing that's different than just going into any bank is employers are involved. They don't have to run this, they don't have to operate the funds, but they will come to you and say, you know what, I can take $5, $10, $20 a week out of your paycheck and put it into this government account, would you like me to do that? And having that little bit of a prompt, the automatic deduction, will encourage people to save.
MARTIN: Rana Foroohar, I understand that the U.K. has already tried something similar with some success, and you lived in the U.K. for a number of years. Can you talk about what worked there?
FOROOHAR: Yeah, you know, the U.K., like the U.S., has similar demographic and growth issues. They definitely have a large percentage of people that haven't saved enough for retirement. And so there is a push now to offer up this sort of plan for folks that don't work in large blue-chip companies that offer 401(k)s and matching contributions, and the sort of thing that really bolster your savings over time. And they have had some success with this. They've had a broader range of the population that is saving now, and that is a very good thing.
But I want to push back a little bit on the optimism around this plan because, frankly, I think that this is a way of government and the state throwing the retirement hot ball back into the laps of the individuals. What we really need to do is fix Social Security. Now we're not going to be able to do that because we have a gridlock Congress, so, again, this is a nice way of giving a nod to the fact that we do have this retirement crisis going on. I mean, I actually consider it to be the real budget crisis in this country. We've been talking about deficits and government budgets for the last several years but we should have been talking about individual ones. I will say, one of the things...
MARTIN: Wait, Rana, could you just stop for a minute. You've given us a lot here. What - you're saying the real retirement crisis is Social Security, and really the key to that is fixing Social Security. People talk about Social Security as just one leg...
MARTIN: ...Of the three-legged stool.
MARTIN: Social Security is kind of one leg, your private savings are supposed to be, you know, one of the other legs. I mean, I guess...
FOROOHAR: Yeah, I think that we overestimate the potential of private savings. We are actually entering - most investment experts believe that we're entering a period in which stock returns are going to be a lot more volatile than they have in the past. I think the idea of counting on the sort of returns that most people have based their retirement projections on - so 8 or 9 percent returns - is completely irrational. I think that most people are thinking the average stock returns are going to be lucky to hit 6 percent. It might be more like 4 or 5 percent. So all of our projections are changing. And I think that the idea that people can expect to get the returns that they did over the last few decades and save enough privately for retirement is, you know - I think it's an overestimation. I also...
MARTIN: Let me just jump in. Let me just...
FOROOHAR: I want to make one more point. I want to make...
FOROOHAR: I want to make...
MARTIN: ...Just a minute. Let me interrupt here. It's a conversation. If you're just joining us, we're talking about saving for retirement. We're talking with Time's Rana Foroohar and NPR's Marilyn Geewax. Rana, if you finish your point.
FOROOHAR: Yeah, I want to make one more point which is that the MyRAs only allow you to invest in sort of low interest-bearing, very conservative investments, which on the one hand is a good thing because it protects your assets. On the other hand, that really reduces what you can earn over time.
MARTIN: Marilyn, you were saying, though, that there is one group of workers or potential workers or new workers that might benefit just by starting early, and that is the youngest workers, people who are just entering the workforce. And I know that you talked with a young woman, a young college student named Monica D'Angelo who's a 22-year-old business student at Duquesne University in Pittsburgh. And you were - tell us what she did that's kind of unusual for her age group.
GEEWAX: Yeah, I called her because she was in Pittsburgh. That's where she's going to school, and that's where President Obama unveiled this plan. So I wanted the perspective of a young person. And she pointed out that her mother really pushed her to open an IRA even though she's just a college student. She was working in the summer. She was setting aside - she said she tried to set aside at least 10 percent of her pay to fund this IRA, somewhat to humor her mother. But really, the more she thought about it, she was excited about the idea that if she starts this young, she'll be able to build over time.
MARTIN: How much has she saved so far?
GEEWAX: I didn't ask her for...
GEEWAX: ...The details. But she says she is putting more money into it. As soon as she graduates in May, she intends to really put aside a part of her income every year in this. And she's enthusiastic about it because she has seen her own grandparents be able to retire fairly early because they started saving early. Now that's the sort of thing that this...
MARTIN: So this - basically, this is offering the - she had her family to kind of give her that wisdom...
MARTIN: ...And kind of get her started.
GEEWAX: It was - it was a family thing.
MARTIN: And what this offers is kind of another kind of a cultural push, or the government kind of giving you that framework to give you that kind of push if you don't have family who can help you do that, so.
GEEWAX: And that's why if you do have an employer, even if you're a part-time worker, the point of this is to get that employer to sort of be like this - like Monica's mom - to push you a little bit and say, hey, you know, we have this program. I've already opened the account. Just put some money in. It'll help steer people. But certainly, I think Rana raises excellent points. I mean, an awful lot of people say, you know, this is never going to be as strong or as important as the Social Security system. So there are a lot of folks that feel that the focus should be on fixing Social Security not worrying so much about these accounts.
MARTIN: Rana, we only have a minute left, and I did want to save some time to ask you about Janet Yellen sworn in as the chair of the Federal Reserve today. Can you just tell us a little bit about what is the task before her and what should we be looking at as we think about her performance in this job?
FOROOHAR: So her task number one will be to help the Fed get out of the asset buying program that they've been engaged in for the last several years known as quantitative easing. That's the program by which the Fed goes in and buys lots of bonds, mortgage-based securities in order to try and bolster the economy. The feeling is now that we are in a recovery. She told me that she's hopeful that the first digit of economic growth this year will be three rather than two, and it looks like we're on track for that.
The trick is that you need to exit that program and pull back on the money flow in a way that doesn't disrupt the recovery. But you have to do it fast enough that you don't let easy money create bubbles in the economy. So it's a very tricky balance.
MARTIN: Rana Foroohar is the assistant managing editor in charge of economics and business at Time. She was with us from New York. Marilyn Geewax is NPR's senior business editor with us from Washington, D.C. Thank you both so much for speaking with us.
GEEWAX: Great to be with you.
FOROOHAR: Thank you. Transcript provided by NPR, Copyright NPR.