Obama's myRA proposal needs flexibility

In this year's State of the Union, President Obama announced his intention to create a new type of savings vehicle for workers who lack coverage through their employers — the myRA or "my Retirement Account." The motivation for the effort was easy enough to see. Changes to the retirement savings landscape over the last 30 years have left far too many workers financially underprepared for their golden years. Pensions have virtually disappeared, and the 401(k)-type plans that were intended to replace them have shifted risk and costs onto individual workers. Today, only about half the workforce is even participating in a plan, let alone saving enough. The reality is that with such poor coverage and low contributions, the transition to a 401(k)-dominated retirement system has become a failed social experiment, one that is exacerbating economic inequalities.

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In response, the administration's myRA will have features designed to make it attractive to lower-income workers. The accounts require low initial deposits, facilitate automatic payroll deductions and will be portable so workers can keep their accounts when they switch jobs. What's more, the deposits won't go down in value because they are guaranteed — just like funds in the basic G Fund of the Thrift Savings Plan, which is offered to every federal employee. The MyRA will adopt the same rules and tax treatment as a Roth IRA, with the specific income-eligibility levels and contribution limits. The Roth rules also mean that account holders will be able to access their after-tax contributions at any time, making the funds available for short-term emergencies when needed. At no additional cost to the employer or employee, workers will be able to access a basic, risk-free mechanism for saving. According to Treasury Secretary Jack Lew, the basic idea of the myRA is to create a starter account for new savers focused on retirement.

Sounds like a good idea. But will it work? Or, more precisely, will it be attractive enough as a savings plan to get both employers and workers to participate?

Research shows that the key to increasing participation in savings plans among low-income workers is facilitating on-ramps to the saving process, such as through mechanisms like automatic enrollment. We have also learned that not having money available to cover short-term needs will undercut longer-term retirement savings. Households without sufficient emergency savings are twice as likely as those with emergency savings to "breach" their retirement account and use the funds for non-retirement needs, thereby incurring penalties and negating the benefit of maintaining funds in a dedicated, long-term savings vehicle. Without accessible saving to meet unexpected costs or make key purchases, families end up drawing down on what they have or excessively relying on debt.

While it may be counterintuitive, policy efforts should support the accumulation of short-term, flexible savings in order to promote long-term retirement security. This is perhaps the most overlooked piece to solving the retirement puzzle for low- and middle-income families.

As currently designed, the myRA program is unlikely to have a significant impact at scale on the long-term prospects of this group of workers. But with certain adjustments and policy reforms, myRAs could facilitate the creation of personal safety nets that would both provide short-term financial stability and lay the foundation for longer-term economic security. For starters, myRAs should be made available to all employers that wish to participate, regardless of their sponsorship of an existing retirement savings plan. The current approach is to avoid competition with employer-sponsored 401(k) plans. Further, we should allow the self-employed to participate and allow for account opening directly on federal tax returns. But the real success will be if potential savers see myRAs as a viable entry point onto the savings continuum. This will mean making the accounts work for people who wish to access their money at their discretion, rather than waiting until retirement. The current approach emphasizes retirement savings and ignores short-term savings, which is counterproductive.

The best bet for this policy effort is to ensure that a myRA can function as a relatively high-yield, low-barrier savings account that will allow workers to get started on building flexible savings that eventually can be used to meet longer-term financial objectives. While the nation would doubtlessly benefit from greater retirement savings, focusing on retirement security to the detriment of immediate financial security is self-defeating. Without the ability to access a pool of savings to respond to emergencies, unexpected events, and other needs, families will consistently choose to prioritize their immediate needs over their long-term goals. Policies that help people meet the full range of their savings needs will not only promote Americans' short-term financial resilience, but also strengthen retirement security. The myRA has the potential to fill this role, but requires improvements before it can be an effective contributor to solving the retirement puzzle.

Cramer is director of the Asset Building Program at New America, a nonpartisan public policy institute based in Washington.