The "MyRA" idea: The real problem is the Federal Reserve

Article Highlights

  • 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

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  • The real problem with MyRAs is they have no real return and are in danger of expropriation by inflation.

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

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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.

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About the Author

 

Alex J.
Pollock
  • Alex J. Pollock is a resident fellow at the American Enterprise Institute (AEI), where he studies and writes about housing finance; government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; retirement finance; and banking and central banks. He also works on corporate governance and accounting standards issues.


    Pollock has had a 35-year career in banking and was president and CEO of the Federal Home Loan Bank of Chicago for more than 12 years immediately before joining AEI. A prolific writer, he has written numerous articles on financial systems and is the author of the book “Boom and Bust: Financial Cycles and Human Prosperity” (AEI Press, 2011). He has also created a one-page mortgage form to help borrowers understand their mortgage obligations.


    The lead director of CME Group, Pollock is also a director of the Great Lakes Higher Education Corporation and the chairman of the board of the Great Books Foundation. He is a past president of the International Union for Housing Finance.


    He has an M.P.A. in international relations from Princeton University, an M.A. in philosophy from the University of Chicago, and a B.A. from Williams College.


  • Phone: 202.862.7190
    Email: apollock@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: emily.rapp@aei.org

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