Time to Bring Back the Lowly U.S. Savings Bond
In his 2014 State of the Union address, President Barack Obama announced a new retirement savings program managed by the Treasury Department: the ineptly named “myRA,” which stood for “my Retirement Account.” Obama flubbed the pronunciation as Treasury Secretary Jack Lew looked on. It was an inauspicious start.
The myRA, which was recently killed off by the Donald Trump administration, was a lot like other dreamy Obama-era programs aimed at problems the public sector probably could have solved with just a little brainpower and taxpayer dollars. The “problem,” as it were, was the legions of lower-middle-class workers whose employers did not offer tax-advantaged retirement accounts, such as 401(k)s. These were people who were left out of the investment arms race, unable to achieve most account minimums with mutual fund companies. With myRA, all you needed was $25 to open an account, with a $5 minimum for subsequent investments.
Having a waiter or a cashier or a housekeeper saving $5 a paycheck is a nice idea, but it doesn’t really move the needle. But that wasn’t myRA’s biggest weakness -- the account was capped at $15,000, at which point you had to roll it over into an IRA. And there was no penalty for withdrawal, which pretty much defeats the purpose of tax-advantaged savings, if you can raid it to pay daily expenses. And, of course, your only choice of investment was government bonds, which would be distasteful under any circumstances, but microscopic yields made the program even less attractive. The federal government spent $70 million to set up the program, and it only attracted 30,000 investors.
Republicans -- rightfully -- opposed the program on the idea that myRA was probably a Trojan horse for a nationalized retirement savings program. Conservatives were plenty paranoid in the Obama years, but Obama had always seemed hostile to savings accounts (like the 529), and the idea of nationalized savings was a legitimate concern at the time. If you recall, the Obama administration had gone through a period of time when there was a vocal discussion of how the government was going to fund itself, and the idea of jamming trillions of dollars of retirement savings into government debt was not out of the question. A lot of things were being discussed back then.
There isn’t anything wrong with a public savings option, but the thing that Treasury has to understand is that it has to be competitive with private alternatives. In other words, it must either be more convenient or have better risk/return characteristics than mutual funds, CDs, savings accounts or annuities. Which is hard to do -- and myRA was none of these things. And it was a hassle to set up an account.
Back when you were a kid, you probably got a $50 or $100 savings bond as a present from your uncle or your grandparents. These went into a folder in your file cabinet, and if you were like me, you fished them out 20 years later, cashed them in, and took yourself out to dinner. But savings bonds weren’t always investment curios -- they once had a legitimate economic purpose: war bonds!
War savings bonds were instrumental in financing World War II, and they were successful because they were more 1) profitable and 2) convenient than private alternatives. They were also marketed heavily. Individuals got a competitive interest rate of 2.9 percent, they saved instead of consumed, and the government was able to pay for fighting a war that happened to be pretty important in human history.
Savings bonds are technically still around, but nobody uses them, because they are not 1) profitable or 2) convenient. Paper savings bonds disappeared in 2011 and are now only available online, which is probably why you haven’t heard of them in a while. That goes down in history as one of the few government programs Obama eliminated, laying off several hundred workers in Pittsburgh, where the bonds were printed and mailed. Paper savings bonds were convenient because you could walk into any bank, plunk down cash and buy one. You didn’t need an internet connection, like you did with myRA. You didn’t need to link bank accounts. There is something beautiful about its low-tech simplicity -- a bond in a folder in your file cabinet.
If savings bonds offered even slightly competitive interest rates (Series EE bonds currently pay 0.10 percent) and were available at banks, and had real marketing muscle behind them, they could definitely play a role in retirement savings, in an unsexy but decidedly retro way; remember, in the old days, Treasury managed to sell billions of them. And it would take some pressure off the bond market, where increased borrowing leads to the potential for sloppy auctions and rising interest rates. There seems to be a collective push to invest in infrastructure -- the perfect rallying cry for a savings bond campaign.
Simple is better. Current Treasury Secretary Steven Mnuchin isn’t taking a lot of heat for ending myRA, as the program was a failure by any measure. Poorer people should be able to save for retirement -- everyone agrees with this. It doesn’t have to be hard.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the editor responsible for this story:
Robert Burgess at email@example.com