BY: John E. Girouard
If you were wondering how the federal government is going to unload those trillions of dollars in long-term Treasury bonds it’s been buying for the past five or so years—quantitative easing is the technical term—President Obama dropped an anvil hint in his State of the Union address last week. You’re going to buy them, with the retirement savings you’ll be putting in the President’s new MyRA program.
If ever there was a misnamed initiative this one ranks near the top. It’s a mash-up of My and IRA. It implies a greater level of possession than the familiar Individual Retirement Account, which came into being forty years ago during another retirement crisis—the 1970s, when a deep, stubborn recession drove corporate defined-benefit pension plans into the ditch.
This time, a deep, stubborn recession triggered by the Wall Street institutions that also sell IRAs drove a lot of individual retirement plans into the ditch. The fix was the Federal Reserve’s buying up a staggering amount of Treasury bonds to keep interest rates low and hopefully encourage investment and economic recovery.
Those bonds that our government now owns are yielding low rates at a time when most experts are predicting that rates will be rising again. When rates rise, the value of a bond falls. So U.S. Treasury bonds have become so unpopular not even China wants them. In November, a People’s Bank of China official gave a speech in which he said, “it’s no longer in China’s favor” to keep buying U.S. debt the way it has over the past decade or so. There are better deals elsewhere.
That means the federal government is stuck with a lot of unpopular bonds and one sure-fire way to get rid of them is to sell them to the American public as a retirement savings vehicle. It’s a wolf in sheep’s clothing.
The pitch for the new MyRAs is that it’s an automatic savings vehicle, a little like the old-fashioned Savings bonds that our parents and grandparents bought for the kids and grandkids. On the surface, it sounds like a good idea—encourage people who don’t have the money or discipline to buy an IRA or Roth to put a little away each week for the next two or three decades.
MyRA contributions will be invested solely in U.S. debt, guaranteed against loss, and will pay the going Treasury bond rate. But there’s a catch or two. There’s no tax deduction for buying MyRAs, so you’ll be buying them with dollars that have already been taxed. The interest you’ll earn, such as it is, will be tax free, but Uncle Sam gets his cut up front and the use of your money for decades to come. And he unloads some of that mountain of bonds.
You, on the other hand, give up control of your money to the government and that money can never participate in a robust stock market or any other asset class, like your home, a business entity, or an insurance policy.
As a financial advisor for more than three decades, I know that automatic saving is the single most important tool in building a retirement fund. But the MyRA idea is just another example of how government controls so much of what we can and can’t do with our retirement savings by dialing up or down the tax rules.
There isn’t enough money in our economy for MyRAs to bail the government out of its bond glut. So we should be alert to what may be coming down the pike. The tax laws already require IRA funds to be invested in stocks and bonds to qualify for the tax deduction. It wouldn’t surprise me at all if at some point in the near future there was a proposal in Washington to require a percentage of all IRA funds to be invested in debt of the U.S. government.
In a capitalistic system, that would mean even more of the nation’s wealth would be locked up and unavailable to start and grow companies, buy homes, and make other investments that ultimately are the engine of individual prosperity.