You cannot understand the Obama administration’s new retirement savings account, known as “myRA” (short for my retirement account), without understanding the underlying dynamic inside the Democratic Party over retirement security. In this sense, myRA is a deliberate distraction from the emerging movement to expand Social Security, to ensure everyone has a measure of dignity in retirement.
A year ago, the Social Security expansion movement was limited to dreamers, and had little to no clout on Capitol Hill. But thanks to some dogged determination, liberals began to recognize that the country stood at the precipice of a retirement crisis. Years of conversion from defined-benefit pensions to defined-contribution 401(k)-style plans made returns uncertain and subject to the vicissitudes of the stock market (as well as the greed of mutual fund managers, who subjected accounts to high fees, eroding the balances). Meanwhile, the savings rate plummeted amid stagnant wages (indeed, the savings rate is currently at historically low levels). What was once a three-legged retirement stool – pensions, savings and Social Security – had been whittled down to one. And the only viable way to avoid a disaster of baby boomer seniors falling into mass poverty is to expand the last leg of the stool, Social Security.
This notion of expansion gradually began to pick up adherents, from activist organizations like MoveOn.org and the Progressive Change Campaign Committee to think tanks like the New America Foundation. In November, Elizabeth Warren endorsed expanding Social Security in a speech on the Senate floor. The expansion movement had some momentum, and tangible legislation from liberal Tom Harkin and moderate Mark Begich to rally behind.
It is in this context that you must place the myRA policy. The Obama administration clearly heard the growing demand to do something about retirement. In a speech in Pittsburgh the day after the State of the Union address, President Obama said that “if you’ve worked hard all your life, you deserve a secure retirement,” adding that most workers don’t have a pension anymore, and while “a Social Security check is critical … oftentimes that monthly check, that’s not enough.”
But instead of going ahead and endorsing Social Security expansion, Obama introduced myRA, a glorified savings account deducted from your paycheck in amounts as little as $5. It’s portable from job to job, and it earns a small amount of interest, the same as the Thrift Savings Plan for government workers. The account can never go down in value, and it’s backed by the full faith and credit of the U.S. government. Plus, you can withdraw the funds whenever you want without a penalty.
This is a nice thing to have, but has little to do with retirement. Americans don’t need a new savings account vehicle; they need higher wages so they can actually manage to save a few dollars out of every paycheck.
In fact, every benefit of the myRA – portability, easy access, protected investment, small interest accumulation, government protection and no fees – could be accomplished through an interest-bearing savings account distributed through the post office, as it did from 1911 to 1967. Postal banking, recently endorsed by the inspector general of the Postal Service, would serve a triple role – promoting savings, helping the Post Service survive, and cutting out the greedy middlemen like payday lenders and check cashing stores that cost the 68 million Americans with little or no access to financial services nearly $89 billion a year. The inspector general says that postal banking, too, could be accomplished by executive order.
In fact, postal banking avoids one potentially malign implication of myRA. The accounts are capped at $15,000: After that, the account holder must roll them into a Roth IRA, subjecting the money to the whims of the market – and handing it over to Wall Street fund managers. You can see myRA in this context as a veal fattening pen for small savers before they get led into the Wall Street slaughterhouse. The administration has yet to finish the Department of Labor’s fiduciary rule, which would force investment advisers to act in the best interests of their clients. Until that gets done, it’s foolhardy to funnel more savings into Wall Street’s hands.
The administration would tell you that the myRA is a small-ball solution merely because it was all they could accomplish without Congress’ involvement, and that it’s a good first step, to get people to think about saving for retirement. But you have to understand what the administration wants Congress to do about retirement security. The president said it in his Pittsburgh speech: “Let's fix an upside-down tax code that right now gives the wealthiest Americans big tax breaks to save, but does almost nothing for middle-class folks, doesn't give them the same kinds of tax advantages … And we need to give every American access to an automatic IRA on the job, so they can save at work.”
The president rightly calls out retirement tax preferences that flow to the wealthy; in fact, these subsidies are massive – over $140 billion a year – and the New America Foundation study on expanding Social Security identifies them as a source of revenue that could pay for the entire expansion. But that’s not what the president wants to do. He wants the middle class to get the same kind of subsidies so they can open their own IRAs – automatically enrolled IRAs, in fact (a behavioral economics nudge, to force people to invest). He wants to double down on a failed system where retirement savings are leashed to the stock market.
That’s the real battle over retirement security inside the Democratic Party. The Obama wing wants the private market – in this case, private retirement accounts – to solve the problem, while the progressive wing wants government to act and deliver a defined benefit through Social Security. Given that Social Security, even in its current state, is the most effective anti-poverty program in America, and 401(k)-style accounts have hastened a crisis, I know which approach I would choose.
It’s pretty clear, then, that myRA is an effort to distract from the burgeoning Social Security expansion movement, offering an alternative that remains grounded in the private market, to throw liberals off the trail. In fact, in a perfect example of how allergic the administration is to using government solutions in this area, even the myRA – a simple savings account – will be run by a private-sector money management firm. The White House chooses not to see how a government program that has been efficiently run for over 75 years can do the job of delivering dignity in retirement, without having to build a better mousetrap.
It’s fine to want to make the current mess of the employer-based retirement account system better – the aforementioned Tom Harkin has a bill to do just that – but liberals shouldn’t take their eye off the prize. They have the simplest, easiest-to-explain solution to this crisis: expand Social Security, and use the hundreds of billions in retirement tax preferences to pay for it. Anything less is a poor substitute.