WASHINGTON — President Barack Obama used his State of the Union speech to roll out a plan to coax low- and middle-income Americans into saving more for retirement.
New retirement accounts being set up by the Treasury Department would target workers whose employers don't offer retirement benefits or who haven't started saving yet for old age. The new "starter" savings program is called "myRA" — for "my IRA." Treasury expects to have a pilot program working by the end of the year. The White House does not need congressional approval to start the program.
"We think this fills a space that, very importantly, we can do by our own authority," Treasury Secretary Jacob Lew told reporters Wednesday.
The plan is a response to a looming retirement crisis. Companies have largely abandoned traditional pensions, which provided workers with guaranteed incomes in old age. Social Security is under strain as baby boomers retire. Many Americans lost their jobs or saw their wages stagnate in recent years, leaving them less able to save for retirement.
Below, a closer look at how the new program works, why the White House says it's needed and whether experts think it will make much difference:
— How would myRA work?
Households earning up to $191,000 a year could have money deducted from their paychecks and put into a retirement fund that pays the same variable interest rate as a retirement fund available to federal workers. Savers would contribute after-tax dollars into the accounts, starting with as little as $25. They could opt for contributions as low as $5 a paycheck.
— Is this a safe investment?
The accounts would be backed by the U.S. government; the principal would be protected from loss. Savers can withdraw what they've contributed tax-free at any time. The plan is voluntary. Although the money would be deducted from workers' paychecks, employers won't have to administer the program or contribute to it. Savers could take the accounts with them when they change jobs and could roll the savings over into another private-sector retirement account at any time. "The people who would likely take advantage of this typically move from job to job often," said Lynn Dudley, senior vice president for retirement and international benefits policy at the American Benefits Council, which represents companies that provide benefit programs.
The accounts are governed by Roth IRA rules that limit annual contributions to $5,500 to $6,500 for those 50 and older. When the balance reaches $15,000, the savings would be transferred to a private-sector Roth IRA.
— What problem is myRA designed to solve?
Americans aren't saving enough for retirement. Boston College's Center for Retirement Research estimates that 53 percent of Americans won't have enough money to maintain their lifestyle in retirement. The National Institute on Retirement Security puts the retirement savings shortfall at a staggering $6.8 trillion — or higher. More than half of workers do not have retirement plans at work, the White House says. Obama's plan is designed to get workers into the habit of saving for retirement by giving them an easy-to-use option that protects their principal.
— How much will myRA help Americans prepare themselves for retirement?
Retirement experts are underwhelmed. "It's just a start. It is by no means a solution on its own," said David Madland, a retirement expert at the Center for American Progress, a liberal think tank closely associated with the Obama administration. The program is voluntary for employers too. And the Obama administration acknowledges that it doesn't yet have a commitment from any employers to offer the program.
Another problem: Most workers won't save adequately for retirement, many retirement experts say, unless they are automatically enrolled in savings programs and forced to opt out if they don't want to save. MyRA is completely voluntary. Others worry that savers can withdraw money freely. The possibility that savers will deplete the accounts before retirement makes myRA a "woefully inadequate response to the retirement crisis," said Teresa Ghilarducci, a retirement specialist at the New School for Social Research in New York.