Is Obama Taking Right Path to Retirement Security?

About halfway through the annual policy speech, after touting the U.S. energy boom as a driver of job growth and pushing for better wages for low- and middle-income workers, Obama turned to a topic he has seldom addressed so far in his presidency—retirement security.

“Today, most workers don’t have a pension,” Obama said. “A Social Security check often isn’t enough on its own.  And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401(k)s.”

To combat this, Obama says he will direct the United States Treasury to create a new way for working Americans to start their own retirement savings, called a “myRA.” He described a myRA as a new savings vehicle that encourages workers to save for retirement by offering, as Obama put it, “a decent return with no risk of losing what you put in.” The President also brought up the idea of automatic IRAs offered through employers.

Concrete details about the myRA proposal were few in the speech, but according to supplemental material published alongside Obama’s address on the White House’s website, a myRA savings account would be offered through a familiar Roth IRA arrangement, and the account’s principal would be backed by the U.S. government.

Contributions, under the Roth-like arrangement, would not be tax-deductible, but future earnings at the time of withdrawal would be tax free. Workers using a myRA will earn interest at the same rate as the federal employees' Thrift Savings Plan (TSP) Government Securities Investment Fund.

The myRA would be open to households earning up to $191,000 a year through their employers. Employers won't incur any cost to offer the MyRAs, according to the White House. Workers will be able to save up to $15,000 before transferring the balance to a private Roth IRA.

In a conference call with reporters a day after the State of the Union address, White House officials said the new savings program will be run by a private financial services firm to be chosen by the Treasury through a competitive bidding process scheduled to start in the months ahead.

David Levine, a principal at Groom Law, which specializes in IRA and retirement savings taxation issues, tells PLANSPONSOR much of what the president proposed is not, in fact, new.

Levine says the administration has quietly been pushing for a long time—since the earliest days of the Obama presidency—the concept of the auto-IRA. He even included the concept in policy statements made before he was elected as President in 2008.

“We’ve had the dial stuck for a while in terms of the percentage of the workforce that has access to and participates in retirement plans,” Levine says. “The myRA is basically another attempt to increase the coverage level, and I think that’s not a bad thing. The important question is, how is this program going to operate?”

Levine adds that, between the Treasury department’s ability to issue bonds and its ability to issue regulatory guidance on Roth IRAs, the Administration does actually have the power to launch the myRA program without depending on Congress.

“This move fits quite well into his theme of, ‘I want to work with the Congress but if need be I’ll work around it,’” Levine says. “He’s clearly trying to appeal to the populist view that’s becoming more and more prevalent beyond our industry.”

And skipping Congress is probably the right move for Obama. There have been a number of bills and proposals to expand IRA access that have languished in the divided House and Senate (see “Mandatory Workplace IRA Bill Returns”).

Like others working in the financial services sector, Levine says the more controversial suggestion for improving Americans’ retirement readiness came next in the speech, when Obama  urged lawmakers to take action to change “an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for the middle-class Americans.”

The proposal caused a small flurry of responses from financial services firms, many voicing support for expanding IRA access but opposing the notion that the existing 401(k) tax structure favors the wealthy.

For instance, in a statement released just minutes after Obama’s speech concluded, The Investment Company Institute (ICI) says it welcomes the Administration’s decision to offer a new savings vehicle to American workers, but it also vehemently opposes changing the tax code.

“It is with regret and deep concern that we heard his comments about reducing the retirement tax incentives that have been part of the foundation for the success of the private sector retirement system for all Americans, including hard-working middle income Americans,” the ICI writes.

A spokesperson for the ICI declined to elaborate on the organization’s position, but she pointed to a recent blog post published by the ICI’s chief public communications officer, Mike McNamee, to explain her group’s opposition to Obama’s proposal to change the way retirement savings are treated for tax purposes. In short, McNamee argues the perception that tax treatment of 401(k)s benefits only the wealthy—or, more broadly, that the benefits are driven by a saver’s tax bracket—is based on a fallacy.

“The tax treatment of retirement savings—tax deferral—is often lumped together with tax deductions,” he writes. “But a deferral of tax is neither a deduction nor an exclusion. Tax deferrals reduce taxes paid in the year of deferral, but increase taxes paid in the year that the income is recognized. Deductions and exclusions, on the other hand, reduce taxes paid in the year they are taken.”

Because of this difference, McNamee argues the benefits of tax deferral cannot be calculated in the same manner used to determine the benefits of an exclusion or deduction.

“This distinction is important because misconceptions about the tax benefit of deferral could lead to misguided and harmful policy proposals,” McNamee says. “Many analysts apparently don’t understand this difference, and thus fall victim to the trap.”

McNamee goes on to argue that an individual’s age is typically more important than his marginal tax rate in determining how much he will benefit from the deferred taxation of compensation contributed to an employer-provided retirement plans, such as a 401(k).

For example, the tax benefits from a one-time $1 contribution to a retirement account are greater for a 45-year-old with a 15% marginal tax rate than for a 60-year-old in the 35% tax bracket, McNamee says. 

A number of other industry advocacy groups voiced a similar opinion on the second of Obama’s retirement-related proposals.

Brian Graff, CEO and executive director of the American Society of Pension Professionals & Actuaries (ASPPA), argues in a statement that, while promoting the importance of retirement savings in the State of the Union, President Obama “chose to attack the 401(k) plan, the primary vehicle for tens of millions of middle-income working Americans.”

“The President said the tax incentives for 401(k) plans primarily benefit those with higher incomes,” Graff says. “In fact, 80% of 401(k) plan participants are middle class Americans making less than $100,000. The President said the tax incentives for retirement savings are "upside down"—meaning they mostly go to the wealthy. In reality, households making more than $200,000 only get 17% of the tax benefits from 401(k) plans, while middle income households enjoy the majority of such tax benefits.”

Graff voiced frustration that lawmakers often fail to recognize the retirement savings tax incentive is not even a permanent write-off like most other tax incentives—instead it is a deferral.

“A dollar deferred today is a dollar taxed tomorrow,” Graff says. “And the tax incentive for employer-based retirement plans comes with nondiscrimination rules and limits on contributions and compensation that ensure the benefits are broad-based and do not primarily benefit the wealthy. It is unconscionable that this incentive—which was so carefully constructed to ensure that benefits are broad-based—is so blithely maligned.”

ASPPA is also negative on the MyRA proposal, claiming the starter IRA accounts would “do pitifully little to replace the significant benefits that millions of American workers get from their employer-sponsored plans if the tax incentives for retirement savings are reduced.”

A full transcript of Obama’s address is available here.