There’s a lot in Obama’s SOTU address worth comment, but one proposal really caught my attention. Lamenting the low savings rate of low and moderate income families–and inferring an unfairness associated with recent stock market gains–the President offered a solution, the myRA. This interesting contraption is supposed to be a “simple, safe, and affordable starter account” that “guarantees a decent return with no risk” of loss. The myRa sounds nice, but it masks financial reality and doesn’t offer a real solution to a problem.
The President is conflating issues here. Those who earn low or moderate incomes tend to save less for retirement by choice. Saving more would be a good idea, but it’s really not difficult to open an IRA or purchase savings bonds. So why do we need a myRA? We don’t, except that existing alternatives require that we accept risk in order to achieve a competitive return.
Risk and return go hand-in-hand when investing. The only way you can earn a competitive return is to accept some risk. The only conceivable purpose of a myRA is to guarantee savers a higher rate of return than they could get in other risk-free alternatives like savings bonds or CDs. Taxpayer subsidies would be necessary to pull this off, making the myRa just another wealth redistribution scheme.
But there’s a deeper problem here that is being ignored. Why do savings bonds and banks offer such low rates of return, below inflation? In a free economy, interest on savings accounts should exceed projected inflation because savers would always demand a return above and beyond what they expect to lose in a currency’s depreciation. But we don’t live in a free economy. Savings rates at banks are driven down by a Federal Reserve that makes money available for next to nothing. All of this is supposed to prime the economy by encouraging artificially high levels of business investment and consumer spending. Is it any wonder that savings rates are so low?
The most effective way to increase returns on guaranteed consumer investments is to get the Fed out of the interest rate business and let markets determine the rates. Of course, the President would have none of this. He favors the near-zero rates that the Fed creates and then proposes a program to raise returns for some Americans at the expense of others. This vicious cycle explains the failure of central planning. Once the process starts–and it’s in full swing now–government must continue to propose inefficient solutions for the unintended consequences of its previous intervention. Each one is designed to curry the favor of voters who fail to see the big picture and are attracted to the idea that they’ll get something for nothing, or from someone else. It doesn’t take long to realize that, as Reagan put it, government is not the solution to our problem; it is the problem. Unfortunately, the President hasn’t figured this out yet.
This idea is ridiculous. The best way to get people to save for retirement is to create good jobs. Obama has failed on the economy. All he can offer is a myra?
Great post. I didn’t know about MyRA as I chose not to watch our dictator.
Like you said, the Federal Reserve is the one responsible for the low returns. It’s really infuriating to see the president take advantage of how ignorant the public is on this issue.
In a free market, interest rates would go up or down depending on how much savings exist at the banks. If banks don’t have enough money to lend (meaning people are not saving enough), banks would raise interest rates to encourage savings. If banks have a lot of money (meaning people are saving a lot), banks would lower interest rates to encourage borrowing.
There would be no need for government intervention for the interest rates to be at the optimal level.
He threw out a bone to the young people with the MyRA since he is killing them with Obamacare, not to mention they can’t find jobs. At least this performance was Shakespearean, “a lot of sound and fury, signifying nothing”. He started off bragging about how great the economy is and then lamented the fact that things were so bad that we have to extend unemployment benefits for the umpteenth time. There was not one job created in this speech unless you consider more pre K teachers to prepare students for great jobs 20 years from now. What we need is more good, high paying jobs – right now. Maybe like the 40,000 that would be provided by the Keystone pipeline. Minimum wage for government contractor workers? How many would that cover? Shaming business for not paying the minimum wage? If he knew anything about businesses, he would know that few actually pay minimum wage. Those who do are training employees in customer service, discipline, work ethic, teamwork – all the skills they don’t get in the government high schools.
He had little to say about Obamacare, nothing about Benghazi and little about foreign policy except let’s give diplomacy a chance. Small ball. He won’t go to the hill and insists on playing rock star with the American people with his speaking tours. It will be interesting to see just how irrelevant this lame duck can become.
Great idea, give the gov more of your money. They already do such a good with what they steal from us now.