In last night’s State of the Union Address, President Obama announced a new retirement saving program called MyRA, which he plans to launch without any new legislation. But he didn’t say a lot about what it is.
Now, we have additional info on the program from the White House. Basically, it’s a program of starter retirement accounts aimed at people who don’t have a lot of savings. Here are some key details:
- MyRA would be a program of small Roth IRAs with access to a special, safe investment that pays a little better than Treasury bills. Remember, a Roth IRA is a retirement account where you contribute after-tax earnings, and can then withdraw money in retirement without ever paying tax on your investment returns.
- Employers wouldn’t run or fund the accounts, but they’d participate by letting employees fund them through payroll deductions, which could be as small as $US5 per pay period.
- Almost any employee of a participating employer could join. You just have to make less than $US191,000.
- Accountholders could accrue balances of up to $US15,000, at which point they’d have to roll the balance over into a regular, private Roth IRA. Voluntary rollover and withdrawal would be availalble anytime, and it looks like normal Roth IRA withdrawal penalty rules would apply.
The accounts would be invested in a security similar to the “G Fund” available to federal employees participating in the Thrift Savings Plan. This fund has all the advantages of short-term Treasury bills (no credit risk or interest rate risk) but pays an interest rate based on the average of outstanding long-term Treasury bond rates. That’s a nice little interest rate bonus. The value of the difference varies over time; this chart from TSP Folio shows how the G Fund generally outperformed T-Bills by a percentage point or two from 1987 to 2010. In 2012, with 3-month Treasury rates effectively at zero, the G Fund returned 1.47%.
Basically, the idea is to get retirement accounts to people who normally wouldn’t have them, by making them available at little cost to either employer or employee, and offering the inducement of a little extra yield.
This program will have a modest cost to taxpayers: Essentially, instead of issuing short-term Treasury bills at almost no cost, the federal government will do a little bit of its borrowing through this G Fund-like security, paying an extra point or two of interest in the process. If you imagine a program at scale with 50 million accounts averaging $US5,000 in balances, the cost to taxpayers would be $US2.5 billion per year for every point of interest rate premium.
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