MyRA won't close the nest egg gap. Maybe the states can

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Mark Miller

CHICAGO (Reuters) - If states are the laboratories of democracy, they need to start some retirement savings experiments - quick. About half of Americans haven't been able to create nest eggs at all, and the labs working the problem in Washington haven't found solutions.

That's my take on MyRA, the retirement saving program President Barack Obama announced during his State of the Union address last week. MyRA - My IRA, if you will - aims to help workers at companies that don't have retirement plans set aside small amounts from their paychecks in a savings bond-like product.

MyRA probably is the best that gridlocked Washington can do to address the yawning retirement savings gap. Obama was able to put it in motion through an executive order.

But it's small-bore. MyRA won't have automatic enrollment, which would boost participation dramatically. Employer participation will be voluntary. And contributions can be invested only in low-return Treasuries. Accounts can be opened with an initial investment as low as $25, and subsequent investments as little as $5.

Outside of Washington, people are thinking bigger. Plans have been floated in 13 states for government-sponsored retirement plans aimed at offering savings plans to more workers, although California is the only state where legislation has been approved.

"States really can be the laboratories of what can work," said David John, senior strategic policy adviser at AARP's Public Policy Institute. John was commenting during a panel discussion last week on what states might do to boost retirement saving at the annual policy conference of the National Academy of Social Insurance (NASI), a respected non-profit research group that pulls together many of the nation's top experts on retirement policy. Experts discussed plans under consideration in California, Washington state and Illinois.

The California plan is called the Secure Choice Retirement Savings Program - a government-sponsored retirement savings plan that would be offered to employees of every California company that doesn't have one of its own. State officials are conducting a feasibility study to resolve questions about how it would be treated under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Service code. If regulatory issues can't be resolved, the plan won't go forward.

Employees would be enrolled automatically, with an opt-out provision, and contribute through payroll deductions to individual accounts. The plan's investments would be professionally managed, and would be geared to produce returns tied to Treasury bond rates; the guaranteed minimum would be 3 percent annually.

The accounts would be portable, following workers from job to job. At retirement, the individual account could be converted to a pension-style annuity.

Like MyRA, the California plan takes aim at the smallest end of the retirement savings market - one that financial services companies don't want to serve. The idea is to get employers who don't have retirement plans to offer a payroll deduction option.

Savings shortfalls are most acute for workers in small companies. The U.S. Bureau of Labor Statistics says just 49 percent of workers at companies with 100 or fewer workers have access to a retirement plan. Part-time, independent and low-income workers also have difficulty accumulating savings, as do minority workers: A recent report from the National Institute on Retirement Security (NIRS) found that two-thirds or more of black and Latino households have no retirement savings.

Those numbers are reflected in California, which ranks near the bottom nationally for retirement coverage, according to NIRS data. Only one in five full-time low-wage workers has access to a workplace plan; overall worker access is 44 percent, compared with 51 percent nationally.

"California is the biggest, and probably the wealthiest state, but it has a bifurcated economy," says Nari Rhee, manager of research at NIRI. "It has some of the lowest levels of benefits for retirement and healthcare."

Retirement inequality is a problem we're going to have to confront, one way or the other.

Data from the Investment Company Institute shows that near-retirement households with annual incomes over $200,000 had saved an average of $885,000 in 2010, compared with just $49,600 for households with incomes ranging from $30,000 to $45,000. And 45 percent of working-age households own no retirement account assets whatever, according to the National Institute on Retirement Security.

These are the seniors who will be entirely reliant on Social Security and state programs such as Medicaid, food stamps and housing. "This will come back and cause severe problems for national and state and local government in the years ahead," says John. "As people retire on less than optimal assets, there will be increasing demand for local services."

The launch of MyRA overshadowed a bigger idea from Senator Tom Harkin (D-Iowa), who chairs the Senate's Health, Education, Labor and Pension Committee. Last week he introduced the USA Retirement Fund Act, which would establish something akin to a national 401(k) plan offering a range of low-cost investments that would be converted into an income stream at retirement, like a defined-benefit pension plan.

Employers with 10 or more workers would be required to offer it - although they wouldn't have to make matching contributions. The self-employed could participate, too. And the Harkin plan would automatically enroll workers at a substantial 6 percent contribution rate (with an opt-out provision).

Harkin and Senator Mark Begich (D-Alaska) have introduced another bill that would have a big impact on retirement security for middle- and lower-income Americans: an expansion of Social Security benefits. Their legislation would increase annual cost-of-living adjustments, rather than cutting them, as would happen if we adopt a "chained CPI" inflation yardstick, as has been proposed by Obama and others.

The bill also would change benefit formulas to increase benefits for lower- and middle-income seniors by about $70 monthly. The bill also lifts the cap on income subject to payroll taxes, currently set at $117,900.

Bold ideas like that have small odds of moving forward in gridlocked Washington, but they need to be part of the debate, noted Michael Lind, co-founder of the New America Foundation and another speaker at the NASI conference.

That's "not just because we have a retirement crisis but because it would be a good thing to do," he said. "Expanding Social Security should no longer be considered a lunatic fringe idea."