In his State of the Union address Tuesday night, President Barack Obama announced MyRA, a new initiative to help Americans save for retirement. Under the president’s proposal, workers would be able to automatically save for retirement through U.S. savings bonds.
This is a valuable first step toward improving workers’ financial security. Less than half of all workers have a retirement plan at work, and about one-third of workers may never have one. And Americans’ savings are often inadequate; about 2 in 5 Americans report that they probably or certainly wouldn’t be able to come up with $2,000 in an emergency, according to a 2012 survey. With this announcement, the president has taken an important step toward improving retirement security for many Americans and has shown his willingness to take action; but there are limits to what the president can do on his own. His proposal also shows the limits of having to bypass a Congress that has yet to take the necessary steps to improve our retirement system.
Some workers may have a lot to gain from the president’s plan. Any workers who are 55 or over who don’t have significant retirement savings—or don’t really trust banks—would now have a safe option to build a small nest egg. And younger workers would have a place to start saving and recognizing the benefits of compounding interest before moving on to an investment account.
But the proposal doesn’t stand as a retirement platform on its own—as the president acknowledged. Risk-free savings bonds are a safe strategy for a few years. For workers more than 10 years away from retirement, however, a retirement fund made up of only savings bonds loses out on the potential gains from investing over decades in a more balanced portfolio that includes stocks in addition to bonds. As MyRA account balances grow, workers may be tempted to shift toward private-sector retirement accounts with higher returns. Yet in some retirement accounts today, as much as one-quarter to one-third of investment returns may go to fees, not to workers. And since it’s possible in an investment account to lose a significant part of one’s retirement savings in a market downturn—as millions of Americans experienced in 2008—there needs to be a balance between risk and return. The Treasury Department will need to get the details right to make MyRA an attractive product that complements other savings options.
But Congress can and should consider bolder proposals for retirement security. To properly solve the looming retirement crisis, Congress needs to take a number of actions. One is to implement the Secure, Accessible, Flexible, and Efficient, or SAFE, retirement plan proposed by the Center for American Progress: a low-cost, independent retirement plan available to all workers and portable from job to job. The SAFE plan includes requirements for professionally managed investments, instead of leaving workers to make complicated investment choices themselves. The SAFE plan also pools risk across workers and retirees to make it less likely that a market downturn will significantly erode retirement savings.
As the president also pointed out on Tuesday night, Congress should examine the upside-down tax breaks for saving when it considers tax reform options this year. Retirement savings incentives often benefit families that likely would have saved anyway: 80 percent of the benefits from these tax incentives flow to the top 20 percent of Americans. Simplifying savings incentives through a universal savings credit that benefits the middle class as much as high-income earners would create a fairer tax code. And matching working families’ savings through refundable tax credits would provide a much stronger savings incentive to build financial security for those trying the hardest to get by. President Bill Clinton suggested this when proposing Universal Savings Accounts in 1999. And it’s still a good idea.
There are plenty of workers who will ultimately benefit from the Obama administration’s first step toward improving families’ retirement security. But Americans’ retirement prospects could be vastly improved if Congress also stepped up to the plate and did its job. The president can’t do it alone.
Joe Valenti is the Director of Asset Building at the Center for American Progress. David Madland is a Senior Fellow with the Economic Policy team at the Center.