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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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