US Savings Rate Falling Again – Here Comes “MyRA”
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
February 18, 2014
IN THIS ISSUE:
1. US Personal Savings Rate is Falling Once Again
2. Obama Unveils New “MyRA” Savings Accounts
3. The Main Problem With MyRAs – Low Returns
4. US Economy May be Stuck in Slow Lane Long-Term
5. 91 Million Americans Aren’t Looking For Work
6. President Obama Lied About the Latest CBO Report
Today we weave together several different topics that are all connected in one way or another. We begin with the US savings rate which is trending lower once again. From 1975 to 2007, the savings rate fell to an all-time low of 2.4%. While it jumped up briefly after the 2008 financial crisis, it is now moving lower yet again.
In an effort to boost the US savings rate, especially for lower income groups, President Obama introduced a new type of starter retirement account for Americans of modest means that he called the MyRA, which stands for “My Retirement Account” and rhymes with IRA.
While the new MyRA may be well intentioned, it is fraught with problems – most notably that it can only be invested in government securities that have yielded paltry returns over the last decade or longer. And when inflation rises, MyRAs are sure to be a big disappointment. I’ll tell you why as we go along today.
Next, the recent Congressional Budget Office report, with its economic projections over the next 10 years, contained several troubling findings that the mainstream media and politicians in Washington deliberately didn’t tell you about. I’ll tell you why below.
Today there are 91 million Americans who are jobless and are not even looking for work. That is 37% of the US adult population, the highest reading in over 35 years. Fortunately, the number is not quite as bad as it looks on the surface, but it is still bad.
Finally, the president recently told a series of whoppers following the CBO’s latest report that claims Obamacare will cost 2.5 million jobs over the next decade. He lied, misrepresented and completely contradicted several key statements he has made in the past. Obama easily hit a new high in his presidency for deception. You really need to read this!
US Personal Savings Rate is Falling Once Again
The US personal saving rate peaked in 1975 at above 15% and since then plunged to below 2.5% in late 2006/early 2007. This represents a huge change in financial behavior on the part of the public. Following the Great Recession in late 2007/early 2009, savings habits improved to above 7.5% but have since reverted to below 4%, as seen in the chart below.
In his State of the Union address earlier this month, the president correctly noted that many Americans don’t have a pension and that “a Social Security check often isn’t enough on its own.” Their financial security is going to depend on higher rates of savings, he said, and there are many things the president and Congress could do to address the low rates of personal savings in America.
Growth enhancing policies and a tax structure that allows people to keep more of their money would be a great starting point. Higher contribution limits and income limits for popular investment tools like the Roth IRA would also encourage more savings. And, even programs focused on basic financial literacy for those struggling to save would make a lot of sense.
But, rather than really push in directions that could encourage greater savings and wealth creation for all Americans, the president’s big idea was to create yet another savings product in an already crowded market – one aimed largely at lower income Americans.
Obama Unveils New “MyRA” Savings Accounts
In his SOTU speech, President Obama introduced a new type of starter retirement account for Americans of modest means that he called the MyRA, which stands for “My Retirement Account” and rhymes with IRA.
While most readers of my E-Letter are higher net worth folks who will probably never consider a MyRA, you may have kids or friends that might consider one. So I want to briefly explain why this new savings gimmick is a bad deal overall in my opinion, and you can pass this information along to those who might seek your advice.
The MyRA program allows the US Department of Treasury to create a new savings option for people who don’t have access to employer-provided retirement savings plans. Participants can start an account for as little as $25 and additional investments can be made for as little as $5. The investments are not tax deductible, and like Roth IRAs they grow tax free and can be withdrawn at any time without penalty, with one exception.
Principal can be withdrawn at any time with no penalty. However, anyone who withdraws any of the interest they earned in the account before age 59½ will get hit with taxes and a possible penalty, just like a Roth IRA.
While the specifics are still in the works, MyRAs would enable employees of companies that do not offer retirement accounts to save up to $15,000 in small increments if they so choose. Keep in mind that the upper savings limit is only $15,000 – I’ll come back to that later.
Most importantly, the government would guarantee that MyRA investors would never lose their principal. Good deal, right? Not necessarily. It all depends on what savers could earn on their other retirement savings accounts – I’ll get to that just below as well.
MyRA money would only be invested in Treasury securities, which means the program gives the government a new set of purchasers for its debt. How convenient! It is less clear why investors need MyRAs. Individual retirement accounts (IRAs) already offer Americans a way to save for retirement and offer much greater flexibility since they can be invested in securities other than Treasuries.
The Main Problem With MyRAs – Low Returns
The president, who has a disdainful view of Wall Street, wants to make sure the MyRA accounts, first and foremost, protect Americans from loss. Uncle Sam will guarantee that there is no loss of principal. But, in return for 100% safety comes very low returns – what else is new?
Low returns that, in fact, could leave the poor Americans investing in MyRA programs worse off in real termsin the long run. And, ask just anyone in the investing world which returns matter, and they’ll tell you it’s all about“real returns” (ie – returns after inflation). So what kind of returns could MyRAs deliver?
Since Obama floated this MyRA idea earlier this month, analysts have been crunching the numbers. The results are not pretty. An investor who would have put money into a MyRA in 2012 would have come out behind, once inflation is taken into account. In fact, over the last 10-year period, the real returns for an investor in a MyRA would be about 1.2% annualized when inflation (as measured by the CPI) is accounted for.
When we go farther back into time and look at returns from January 1, 1987 (when interest rates were substantially higher) to the present, MyRA investors would have earned 5.5% on average per year (gross, not inflation adjusted). That might impress some until they consider the fact that the S&P 500 Index returned apprx. 10.3% over the same period of time.
Small percentage differences matter over long periods of time. A $10,000 investment in the S&P in 1987 would have