In the previous posting in this mercifully brief series we
tried to describe the “MyRa” proposed by President Obama in his State of the
Union Address. Putting the best possible
light on the subject, the MyRA does not appear to have the potential to do what
Mr. Obama evidently assumes it will do: encourage Americans to save for
retirement.
If nothing else, the cap amount, $15,000, is insignificant
to the point of meaninglessness. Even
given the fact that it will be “tax free” (i.e.,
post-tax), few people can live off $15,000, even with interest added, for even
a single year.
There is, in fact, no way that the interest rate is going to
keep up with the decline in the value of the money as the government continues
to flood the economy with increasingly dubious debt. The program is economic tokenism, pure and
simple.
There are, in addition, some serious conceptual
problems. The most obvious is that the
program requires that workers reduce what even the president agrees is
inadequate consumption income in order to accumulate savings for inadequate
retirement income. “Forgo consumption
today,” he might almost be saying, “so that you can have even less tomorrow.”
The program imposes an additional regulatory burden on
employers, admittedly voluntary . . . for now.
If you like not having a retirement plan, can you keep it? In any event, there is no perceived benefit
to the employer. Production costs will
increase with no increase in production, even if only slightly.
Then there’s the more serious problem that the program is
funded by reducing consumption at a time when what is needed to stimulate the
economy is increasing consumption. That’s what past savings is, after all: the
excess of income over consumption.
As for the “assets” that the savings are used to purchase:
government debt. To be sure, the MyRA
scheme is not anywhere near as bad as the Social Security Trust Fund. Government debt is an asset to persons holding it who are not the issuing
government.
It’s just not a very high quality asset, especially at this time when the present value of future tax revenues that back all government
debt are getting more than a little “iffy.”
No government can continue to finance on debt without a solid plan for
repaying that debt that makes the debt-holders feel secure in their investment.
The Social Security Trust Fund, however, consists of bonds
that have been issued by the government to replace the taxes it collected to
put in the fund in the first place. In
effect, the bonds in the Social Security Trust Fund are IOUs for money that the
government borrowed from itself.
The trust fund is therefore solvent only if you fail to look
at the financial condition of the issuer of the bonds held by the trust fund. It’s like calling yourself a millionaire
because you inherited a million dollars that you put in a vault, replaced with
an IOU to yourself for a million dollars, and then spent the money.
(What saves the Social Security Trust Fund, however, is
that, while people are under the illusion that they own the amounts in “their”
accounts, they really don’t. A careful
reading of the Social Security Act reveals that, not only do we not own “our”
accounts, Congress reserved the right to reduce or “adjust” benefits at any
time, without having to satisfy the “takings” clause of the Constitution. All Congress has to do to stop payment of all
benefits . . . and cause an armed revolt . . . is to come up with a good reason,
e.g., there’s no money there. Don’t believe it? Check out the 1960 court case, Flemming v. Nestor. It’s an eye-opener.)
Getting back to the MyRA, given the low rate of return, the
small cap amount, and the fact that there would be no penalties for early
withdrawal, it’s highly likely most people who sign up for it will use it to
accumulate savings for something, e.g.,
a holiday gift fund, new car, vacation, or whatever, then withdraw the money as
soon as they want it, not waiting for retirement.
Bottom line here? The
MyRA is a very bad idea, if only because it makes it seem as if something is
being done to address a serious problem, when, in fact, nothing is being done
at all.
What should be done?
We’ll take a look at that in the next and final posting in this series.
