One unexpected idea on US President Barack Obama’s to-do list is a new public pension powered by behavioral economics.
Obama touted the MyRA, a “new savings bond” for private-sector workers who don’t have pensions (which is most of them) or tax-advantaged retirement investments like 401ks and IRAs (about 40%). More broadly, more than half of Americans aren’t saving enough money to maintain the standard of living they enjoy during their working life, even with the help of federal Social Security benefits.
The president will issue an executive order allowing Treasury to create the new savings plan where workers can automatically direct a certain portion of their income into 30-year savings bonds, tax-free. Drawing on one of the most widely-touted findings in behavioral economics, Obama wants to make it so that money is deducted from paychecks before workers receive them, and the investment accounts will steadily grow without any active decision-making required.
MyRA is designed to be used by private-sector companies as a “starter savings account” for middle-class families. It appears similar to a plan underway in California that would pool worker savings into a $6.6 billion pension fund.
The Reinharts and Rogoffs of the world will no doubt be crying “financial repression,” but the move could protect small savers from the fees charged by Wall Street fund managers that might otherwise make setting aside a nest egg less advantageous. Millions of workers could be included in the program, and they will reportedly be able to transfer their savings out of US debt and into other assets without penalty, though withdrawing from the fund before retirement would incur fees.
The Obama administration would really like to create a broader program that automatically sets aside a portion of all worker savings into an IRA, unless they opt out of it. But that would require authorization from lawmakers in Congress, which is an unlikely proposition at best.