By Geoffrey Pike
Friday, January 31st, 2014
I’m not big on watching State of the Union speeches, but I did read the highlights of the most recent one… and one thing in particular grabbed my attention.
President Obama proposed a plan called “MyRA,” which is shorthand for “my IRA.” It’s supposed to be similar to a Roth IRA account offered by employers.
Since this portion of Obama’s speech was short, I will quote it here in full:
“Let’s do more to help Americans save for retirement. Today, most workers don’t have a pension. 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 401ks. That’s why tomorrow I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA. It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in. And if this Congress wants to help, work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for middle class Americans. Offer every American access to an automatic IRA on the job, so they can save at work just like everybody in this chamber can.”
The idea being promoted with this plan is that people can elect to start out with a small amount of money and have contributions as low as $5 deducted from their paychecks. This is all in the name of the poor, because they often don’t have enough money to contribute to retirement plans.
I think a cynic could criticize this whole plan from a lot of different angles. Ironically, I was working on an article about the possibility of 401(k) confiscations in the future, and this proposal by Obama could be seen as a subtle first step towards the government getting its hands on retirement accounts.
It starts out as voluntary… and eventually will be pushed as a mandate.
While eventual 401(k) confiscations could be part of the agenda of MyRA, I think there is a bigger reason for Obama to push this plan. It’s actually a short-term solution for Obama to partially fund the deficit, as well as a longer-term plan to kick the can further down the road.
Obama’s plan says the funds would be backed by the U.S. government. He claims these will be no-risk investments. But if they are investments, somebody has to bear the risk…
The way I see it, the government is trying to get millions of people to hand over their money to buy government debt. Once this is achieved through MyRA, it wouldn’t surprise me if it were offered to all 401(k) holders.
Again, it will start out voluntary, but perhaps it will eventually be pushed as mandatory. And it will become easier to push if there is some kind of a major stock market correction.
Obama’s speech happened to occur the night before the Federal Reserve announced a continuation of its tapering — which is nothing more than a reduction in its rate of monetary inflation. So while the Fed continues to create money out of thin air, it is doing less of it.
This means the Fed will not be buying up as much government debt. And this means the deficit will have to be funded more by foreign central banks or investors.
Some of the politicians in Washington, D.C. are starting to see the writing on the wall. They realize the Fed can’t support them forever — or at least not to the same extent it has been. The government does not want to cut spending and is therefore trying to come up with other ways to raise money.
While this new MyRA plan will not add up to a lot at the beginning — particularly if it really is just low-income people who start out — it will eventually add up to many billions of dollars in just a few years. And if the government can get the average 401(k) investor to start buying this “guaranteed” fund down the road, then it could be looking at hundreds of billions of dollars.
MyRA vs. Social Security
What are the differences between MyRA and Social Security? One difference is that MyRA will be voluntary — at least for now.
Another is that your MyRA account will have your name on it… although it is not too different from Social Security in that respect. Social Security does tell you how much you can expect to receive when you retire.
But there are also striking similarities between the proposed MyRA and Social Security. The main similarity is that the Treasury will take your money and spend all surplus funds.
For many decades, the government has spent the surplus money from Social Security. The government would collect Social Security taxes in excess of what it had to pay out in Social Security benefits, and the rest would be dumped into the general fund and spent.
There is no Social Security lockbox. There is a Social Security trust fund filled up with a bunch of IOUs from the government. Social Security holds more government debt than China.
This is how Bill Clinton was able to claim budget surpluses in the late 1990s. The government was still running a deficit, but the surplus funds from Social Security were enough to cover it. It has all been an accounting gimmick.
But with the major recession that began in 2008 came smaller than expected tax collections. In addition, we have seen the start of baby boomers hitting retirement age.
So in the last few years, we have seen an end to Social Security surpluses. And as Social Security goes further into deficit, the government is desperate for new funds…
What better way than to start a whole new Social Security-like Ponzi scheme?
Now the government can get more money for the Treasury to spend and write more IOUs. This time, the IOUs will be held by individual investors in their MyRA accounts instead of the Social Security trust fund.
The government is doubling down on its bets. Instead of just sabotaging Social Security, the politicians figure they can get away with the same trick again. The saying “fool me once, shame on you; fool me twice, shame on me”really applies here.
Let’s see if the American people are big enough suckers to fall for this.
Interest Rate Risk and Government Risk
These “investments” will put the taxpayers on the hook for more risk. When the government guarantees something for nothing, you can be sure someone else is paying something for nothing. How can Obama promise “a decent return” with a guarantee of no risk?
There has to be a risk to somebody, and that risk is being pushed onto the American people — particularly taxpayers. However, the risk isn’t exclusive to taxpayers. Anyone who has U.S. dollars is taking on risk too due to the threat of more inflation.
If the government is going to issue the equivalent of bonds to MyRA investors, what will happen if interest rates rise?
When interest rates go up, the price of a bond goes down. So unless you hold that bond to maturity, the price of your investment will be lower. And if interest rates rise and you do wait for a bond to mature, then you will likely get paid back in money that has lost significant purchasing power.
In the end, there are really only three likely scenarios…
One is that the Fed inflates the money supply a lot, and the MyRA investors lose money through a depreciated currency.
The second is that taxpayers foot the bill and bail out the government, which then pays on its promises to the MyRA investors.
The third possibility is an outright default, which means MyRA investors will lose all of their investments. While I don’t see this happening in the near term, anything is possible in the long term.
Though it doesn’t seem likely, there is also a fourth possibility that is even more remote…
The fourth scenario is that MyRA investors turn their money over to the government, the government keeps their money tucked away safe and sound, and it returns it all as promised.
Are there any fools out there who believe this one?