Economics, U.S. Economy

The “MyRA” idea: The real problem is the Federal Reserve

Image Credit: shutterstock.com

Image Credit: shutterstock.com

The small retirement savings accounts or “MyRAs” announced in President Obama’s State of the Union address are a tax-advantaged variation on the old, established theme of using government debt for small long-term individual savings: think of venerable US Savings Bonds. Leaving aside the political question of autocratic executive behavior, the big financial problem with this idea is that, under current conditions, they offer a zero to negative real interest rate to the people trying to save—they won’t be making any progress at all, or indeed losing ground, when inflation is taken into account.

MyRAs would be modeled on the “G Fund” for government employees. This fund returned 1.47% in 2012, while CPI inflation was 1.7%, resulting in a negative real return. For the three years 2010-2012, this fund returned on average 2.24%, while inflation averaged 2.3%, again a negative real return. This situation means that in real terms, every year the savers have accounts worth less than the money they put in. Not much of a way to finance a future retirement.

So the real problem is no real return and the danger of expropriation by inflation. This problem is caused by the strategy of the Federal Reserve, which is to depreciate the purchasing power of the dollar by 2% a year in perpetuity, while simultaneously suppressing the interest rates on government debt. This strategy is meant to advantage debtors, notably the government itself, but it disadvantages those trying to build savings.

A much more sensible design for MyRAs would be to have inflation-indexed government debt with positive real interest rates in these accounts. This would protect the savers and their retirements against the Fed—protection they most definitely need. The program would then be a healthy offset to the Fed’s current policy of crushing conservative savers.

Alex J. Pollock is a resident fellow at AEI.

Follow AEIdeas on Twitter at @AEIdeas.

6 thoughts on “The “MyRA” idea: The real problem is the Federal Reserve

  1. I am a bit surprised to see—in a free market arena lie the AEI—a reiteration of the idea that savers are entitled to returns.

    in pure free markets of course, savers take risks and may, or may not, have positive returns.

    Even with a gold standard and savings in the form of gold, there is the risk that gold will fall in value, or that gold is stolen. Banks can fail due to mismanagement or fraud, even in a gold standard (set aside the issue of free banking).

    Sure, there would be private insurance for deposits, but private insurance can fail (see AIG) or the insurance might not cover losses due to fraud, or even is extensive covenants were not met (only bonded employees for example).

    It is tough to lend out anything—including gold—without taking a risk. There is even the threats of snowballing disintermediation reducing the value of all assets, leading to more disintermediation, as savers stuff gold into their mattresses.

    And, due to demographic bulges or other reasons, there may be long periods in which savings are larger than demand for capital. In this situation, banks would charge fees to store gold, probably higher than interest paid.

    Ironically, about the only assurance I can see that depositors get their money back is national deposit insurance (now, the FDIC) and a central bank that can print money and make good on lost deposits, even if extensive.

    That is not free markets.

    Is the Fed too expansionary?

    The record suggests that obtaining strict price stability in modern Western economies, such as Japan and Europe, leads to economic stagnation.

    China has been booming, I suggest not due to commie management, but a central bank that is growth oriented.

    A peevish fixation on a single, difficult to measure nominal variable—inflation—may not be the best monetary policy, and recent history suggests is actually contractionary.

    Inflation is annoying, I grant that.

  2. A much more sensible design for MyRAs would be to have inflation-indexed government debt with positive real interest rates in these accounts.

    No, a much more sensible design would be to let savers/investors choose their own investment vehicles, just as in “regular” IRAs. MyRAs are just a cynical means for the Federal government to con even the poor into lending their pennies to the government.

    Even with a gold standard and savings in the form of gold, there is the risk that… gold is stolen.

    Including by the government. See FDR’s EO Executive Order 6102, “confiscating” all privately held gold.

    Eric Hines

    • Poor people don’t usually have bank accounts, friend. (Some do, granted.) I’m all for upwards economic mobility, but really the only people who could make good on these RA’s are middle class.

  3. Why are we comparing savings accounts to inflation? I mean, no shit your money loses value in a savings account. Shouldn’t we be comparing them to the current products offered by the market right now? The current average interest rate on saving accounts is 0.06%, and most major banks only offer 0.01%. I’m no fan of Obama’s, but 1.47% is a helluva lot better than 0.01%.

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