Suppose that your employer doesnt offer retirement benefits, and you are a waitress holding down two part-time jobs to support your kids, a recent graduate grappling with student loans, or a janitor. You probably dont have $1,000 of extra savings to open an IRA with a brokerage firm. However, you are one of those folks Treasury Secretary Jack Lew wrote about in last Sundays edition of The News & Observer. The waitress, recent graduate and janitor were mentioned in his column.
The treasury secretary is correct when he warns of the bleak retirement picture facing many Americans, but especially the working poor. As Mr. Lew points out, many Americans are not participating in their companys 401(k), and still others work in jobs that dont offer retirement savings at all. Study after study shows that Americans arent saving enough.
The president has proposed a solution for the working poor and lower middle class called MyRA, short for my retirement account. The program would allow employees to make small contributions of as little as $25 to open an account and $5 per pay period thereafter. The money would be invested via payroll deductions into U.S. treasury bonds. As the treasury secretary points out, the principal investment would be safe because the U.S. government guarantees it. The balance could grow for 30 years or until the investor has a balance of $15,000, whichever occurs first. At that point, it would be rolled into a Roth IRA. The returns would be about 1.5 percent to 2 percent per year based on current treasury yields. Contributions wouldnt be tax deductible, and any gains would only be taxed upon withdrawal. The accounts are portable, so the employee could transfer the account if they changed jobs. In addition, there wouldnt be a penalty for withdrawing money (although there might be a tax on any gains). On the surface, this sounds like a good way to get people to save.
Not a big nest egg
The presidents proposal and the treasury secretarys description create a rosy picture of millions of low-wage workers squirreling away a few dollars until theyve come up with a nest egg thats big enough to become a full-fledged Roth IRA. Im not sure why its part of the program, but married couples with incomes up to $191,000 are eligible to participate. Setting aside that quirky detail, the MyRA doesnt do much for the working poor.
For starters, employers dont have to offer it. Since the U.S. Treasury will administer the program through a payroll deduction, it wont cost employers much to participate. However, this program is aimed at employers who dont offer much to their employees in the first place.
If we accept the notion that low wage employees will contribute to a MyRA, the long-term result isnt very encouraging. If a fast food worker decides to invest the minimum amount, or about $130 per year, at 2 percent interest for 30 years, hed have a nest egg of $5,400 before taxes ($3,000 in todays dollars). Last I checked, that amount of money would cover about two or three months of living expenses. Even if the fast food worker increased her contribution over time, it still wouldnt amount to much of a nest egg. Even someone who contributed $25 per pay period or $650 per year would only reach the $15,000 threshold in 20 years. And $650 is a staggering amount of savings for someone working at or around the minimum wage.
Detached from reality
The inadequacy of MyRA is deeper than the inability of small contributions to create a meaningful nest egg. The idea is rather detached from reality. The folks working in jobs without any retirement benefits are living paycheck to paycheck. By the time the groceries, rent, and other expenses are paid, theres no money left over. Many of these people are already trying to figure out how theyll manage to pay the subsidized premiums for health insurance under the Affordable Care Act or make up for the reduction in the Supplemental Nutrition Assistance Program (SNAP or food stamps). In other words, low minimums, portability, and safety might be great features, if the working poor could afford to participate in the first place. Although they face a daunting retirement challenge, retirement isnt on the top 10 list of their financial problems.
The president seems to recognize this problem when he talks about the stagnation of wages in the last several decades and the pressures facing average families. Until those issues are addressed in some meaningful way, its hard to imagine the working poor contributing to a 401(k) or MyRA, if either option is offered. Sadly, the folks that President Obama and Secretary Lew are trying to help are more likely to be the victims of payday lenders and other purveyors of high interest personal loans than they are to contribute to a MyRA.
MyRA may serve one useful purpose. Workers can withdraw funds from a MyRA without penalty (although as Ive already mentioned, the gains would then be taxed), so the account might serve as a small rainy day fund when the car breaks down or theres a sudden illness. Unless theres some kind of fundamental improvement in wages, the only ones who might feel better about retirement security among the working poor will be the president and his treasury secretary.
Andrew Siltons Meditations on Money columns can be found twice a month in The N&Os Work&Money section. He is a retired money manager living in Chapel Hill. He was CIO for the North Carolina Retirement System from 2002-2005. He writes the blog http://meditationonmoneymanagement.blogspot.com/