So you listened to the State Of The Union and heard President Obama muff the pronunciation of MyRA. Was that “My IRA?” Or was that “Myra,” like a woman’s name? I’m going with the latter.
There’s an excellent 2,100 word piece entitled, “Will MyRA Solve The Retirement Crisis?” on Daily Capital you may want to check out. In the post you’ll find several shocking statistics about retirement:
- 48%, or 44.5 million workers, worked for employers who did not offer a retirement plan as of 2011 (NIRS).
- Approximately 45% of households, or 38 million households, have no retirement account assets (401k or otherwise).
- The median value of retirement account balances is $3,000 for all working-age households and slightly higher ($12,000) for those near retirement age.
- Less than 1 out of 10 eligible working age individuals voluntarily contribute to an IRA.
Even if these statistics are half true, we’ve got a big retirement problem on our hands! Social Security is not going to be nearly enough, especially since it’s underfunded in its current state. (See: How Much Savings Should I Have By Age)
THE TWO GOOD THINGS ABOUT MYRA
Before I begin to discredit MyRA, let me first highlight two excellent points about the program:
1) Guaranteed Returns. MyRA offers principal protection backed by the US government. I think a lot of people are afraid to invest because they are afraid of losing money after so many turbulent cycles. A guarantee should encourage more people to contribute, even if the returns are in the low single digits. MyRA is tied to the same variable rate as the Thrift Savings Plan.
2) High Income Limits For Contribution. One of the things that really bums me out about government policy is how low the income limits are for contributing to government promoted retirement plans e.g. $69,000 for the IRA if you are covered for a retirement plan at work. MyRA is available to any household that makes up to $191,000 per year, or $129,000 for single individuals. Such income levels no longer discriminate against individuals and households working in high cost areas such as San Francisco, New York City, and Los Angeles.
Beyond these two positives there’s not much else to get excited about unfortunately.
THE DISAPPOINTINGLY BAD THINGS ABOUT MyRA
1) You Can Only Grow MyRA to $15,000. $15,000 is better than a punch in the face, but $15,000 isn’t going to get you very far in retirement. The initial contribution can be as low as $25 and workers may contribute as little as $5 at a time through automatic deductions from their paycheck. Once you get to $15,000 you’ve got to then figure out how to invest the funds in a ROTH IRA conversion. Given the participants of MyRA will probably be some of the least savvy investors, it’s easy to see them buy something outside of their risk tolerance. Furthermore, think about how many people won’t convert their MyRA into a ROTH IRA due to the paper work, laziness, or confusion of the conversion. Red tape strikes again!
2) MyRA isn’t mandatory. When nobody is there to kick your ass to go work out, you’re probably not going to work out. The reason why the government withholds taxes throughout the year is because it knows we can’t be relied upon to pay our fair share. With MyRA being an optional adoption for employers, you’re not going to get close to a 100% participation rate because why should employers take on added paperwork and administrative costs? More importantly, if the government doesn’t force the employer or the employee to save, neither will. Consumers have no hope in saving for retirement because the average consumer spends almost everything he or she makes. The car commercials during the Super Bowl will make sure of that!
THE ONLY SOLUTION TO THE RETIREMENT CRISIS
When you think about Australia, what do you think? I think the Australian Open, outlaws from England, the Great Barrier Reef, Bondi Beach, vegemite, kangaroos, really friendly people, walkabouts, travelers, and some of the world’s wealthiest people. What do I mean “wealthiest people” since all you know about Australia is its huge pool of natural resources.
The reason why Australia leads the world in inheritance at $501,000 is due to their Superannuation system. The Superannuation system is a mandatory retirement savings system forced upon employers to pay 9.25% of an employee’s salaries and wages into a superannuation fund. The minimum obligation required by employers is set to increase to 12% by 2022.
Most superannuation is taxed at a flat rate of 15% at two main points: on contributions, and on earnings. Capital Gains Tax within the fund however is taxed at a rate of 10% if the assets are held for longer than 12 months. Compare these tax rates to the tax rates in America and the normal income tax rates in Australia which are much higher. Finally, you can’t touch the superannuation money until 55-60, depending on when you were born.
The average inheritance in America is 75% less than Australia at $180,000 because we are also the biggest consumers in the world who bathe in excess. Credit is too plentiful to allow for everybody to diligently max out their 401k’s and spend within their means.
The government should wield a big stick and put into law that every company who employs at least one person provide at least one type of retirement savings plan at a low cost or no cost for administration. While the government is at it, they might as well institute my tax rates based on work ethic proposal to reward diligent people, regardless of how smart they are.
Without making MyRA or any retirement savings plan mandatory for employers or employees, we’re going to still have the same old retirement crisis talk a generation from now. We just can’t trust people to do what’s financially best for themselves over the long run. I know Financial Samurai readers will be fine, but we just can’t think of ourselves because eventually there will be massive social unrest.
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About the Author: Sam began investing his own money ever since he first opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college on Wall Street. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 35 largely due to his investments that now generate over six figures a year in passive income. Sam now spends his time playing tennis, spending time with family, and writing online to help others achieve financial freedom.
Updated for 2017 and beyond.