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Senate Finance Subcommittee on Social Security, Pensions, and Family Policy Hearing

February 26, 2014

Testimony by Mark Iwry, Senior Advisor to the Secretary and Deputy Assistant Secretary (Tax Policy) Retirement and Health Policy, United States Department of the Treasury, Washington, DC

Chairman Brown, Ranking Member Toomey, and distinguished members of the subcommittee, thank you for the opportunity to appear before you today to discuss retirement savings for low- income Americans. We appreciate this subcommittee's interest in this topic, and applaud your highlighting retirement security issues at your recent hearing on December 18, 2013, titled "Social Security & the Retirement Crisis."


At that hearing, Mr. Chairman, you noted that "retirement security in America has traditionally been thought of as a three-legged stool, consisting of Social Security, employer-provided pensions, and personal savings and investment," enabling Americans to maintain the standard of living they enjoyed while they were working, and "to buy homes, start families, and pay for education." However, as you also observed, "for far too many Americans, Social Security is the only leg left standing," as only about half of the U.S. workforce is covered by an employer-sponsored retirement plan.

The Administration and the Department of the Treasury remain committed to working with Congress to help secure a dignified retirement for all Americans. First and foremost, Social Security is and must remain a rock-solid, guaranteed, progressive benefit on which every American can rely. To supplement Social Security, the most secure retirement traditionally has included employer-sponsored retirement plans and individual savings. Yet too many Americans are not on a path to be sufficiently prepared for retirement. Tens of millions of American workers lack access to employer-sponsored pensions or retirement savings plans. This puts the onus on these individuals to set up and save for retirement in IRAs (individual retirement accounts and individual retirement annuities) on their own. However, fewer than one out of ten workers eligible to contribute to an IRA do so. By contrast, roughly seven or eight out of ten workers who are eligible to participate in an employer plan choose to do so (and up to nine out of ten of those who are automatically enrolled in a 401(k) plan participate).

The risk of an insecure retirement is especially acute for women, minorities, and lower-income Americans. Women continue to be less prepared for retirement than men. White households have six times the wealth, including retirement savings, of African American or Hispanic households. And low-wage and part-time workers are only one third as likely as high-wage and full-time workers to participate in an employer-based retirement plan.

A number of factors are at work here. In addition to lack of access to employer-sponsored plans, those who are not currently saving may encounter minimum balance requirements and administrative- or investment-related expenses that make it difficult to sustain very small accounts. Also, many potential new savers may be hampered by concerns about investment risk and volatility, the challenge of making decisions regarding investment options and other financial choices, and the need to take initiative to establish an account.

The myRA Retirement Savings Initiative n1

In his State of the Union address on January 28, 2014, the President announced "a new way for working Americans to start their own retirement savings . . . a new savings bond that encourages folks to build a nest egg." This Treasury security, to be held in a Roth IRA, will be designed to help fill a niche in retirement saving by providing a vehicle for deposits, largely by new savers, that may be too small to be of interest to most commercial financial institutions that offer IRAs. This vehicle, called "myRA" (My Retirement Account), is targeted especially to moderate- and lower-income workers, potential first-time savers who are not eligible to participate in employer-sponsored plans and are looking for a simple, safe, and affordable way to start saving. At the same time, the President emphasized his continuing support for legislation to provide for automatic enrollment in workplace IRAs ("auto-IRAs") for employees of firms that do not sponsor any retirement plan - a proposal he has included in every Administration budget since he took office.

Under the myRA program, workers looking to start saving will be able to purchase a specially-designed Treasury retirement savings bond held in a Roth IRA. The bond will have an add-on feature, meaning that additional contributions will increase the value of a single security, instead of requiring the purchase of multiple securities. The Roth IRA that holds the retirement savings bond will be subject to the same tax treatment and other rules applicable to all Roth IRAs. Accordingly, the myRA saving opportunity will be available to households who are eligible to contribute to Roth IRAs - those earning up to $191,000 a year (married filing jointly; up to $129,000 for individuals) - and 2014 annual contribution limits of $5,500 ($6,500 if age 50 or older). All of these dollar amounts are adjusted for cost-of-living changes.

Other key features of the myRA program, which Treasury intends to begin phasing in by the end of 2014, include the following:

. Starter Vehicle - Making It Easier to Begin Saving for Retirement. As noted, this new product will be targeted to those who lack access to a workplace retirement savings plan (usually the most effective way to save for retirement). Starting to save is only the first step toward a secure retirement, and Treasury and the Administration want to help more Americans save for their future. Initial investments could be as low as $25, and contributions that are as low as $5 could be made through payroll deduction. As starter accounts, myRAs will be limited to a cumulative $15,000 each - not a target for saving but rather a transition point at which the individual's savings would shift to a private-sector Roth IRA. If a saver's myRA never accumulates to $15,000, it will be shifted to a private sector Roth IRA after 30 years.

. Incubator of Small Accounts. While obviously not nearly enough to fund a secure retirement, $15,000 may be enough to "prime the pump" and instill a lifelong habit of continued saving, and should be enough to make a saver's account viable in the private sector. In other words, myRA accounts could serve as incubators for accumulations of savings small enough that their administrative costs could exceed their earnings. After successful savers "graduate" to private-sector Roth IRAs, they will be able to continue saving and accumulating balances greater than $15,000 that could be invested in diversified investment portfolios with greater growth potential.

. Available Through Payroll Deduction at the Workplace. During an initial phase, myRAs will be offered, only by payroll deduction, to employees of employers that choose to participate. Employees will sign up for myRA accounts online and will not be charged administrative or investment fees. The accounts will be easy for employers to offer, as employers will neither administer the accounts nor contribute to them. As is currently the case for Roth IRAs generally, the account owner - not the employer - is responsible for complying with limits on Roth IRA eligibility based on compensation as well as annual IRA contribution limits. As noted, myRA is intended to help working Americans who lack access to an employer-sponsored retirement plan. Employees who are eligible for employer-sponsored plans will continue to have many good reasons to participate in those plans rather than in myRAs. As a result, myRAs will complement, not compete with, employer-sponsored plans. Additional contribution channels, such as direct participation by the self-employed, will be explored over time, and could be added as feasible.

There is reason to expect that linking saving to an employment-based payroll deduction system could be an important step in boosting participation. For example, millions of employees bought U.S. savings bonds annually through Treasury's former payroll deposit savings bond program, which for decades allowed employees to buy savings bonds through workplace-based payroll deduction.

. Safe and Secure. As noted, the retirement savings security will be held in a familiar Roth IRA account and will constitute the only investment in the IRA. Savers will benefit from principal protection, because the value of the bond, and therefore the IRA account balance, will never decline. In addition, the security, like other U.S. savings bonds issued under 31 U.S.C. 3105, will be backed by the full faith and credit of the United States.

Savers will earn interest at the same variable interest rate as the federal employees' Thrift Savings Plan Government Securities Investment Fund (G Fund). The G Fund interest rate calculation is based on the weighted average yield of all outstanding Treasury notes and bonds with four or more years to maturity. Over the last ten years, the G Fund has earned annual compounded interest ranging from 1.47 percent to 4.93 percent (3.39 percent compounded over those ten years).

. Roth IRA Tax Benefits. Because the IRA holding the bond will be a Roth IRA, the contributions an individual makes can be withdrawn tax free at any time. In addition, earnings that are withdrawn will be free from tax or early withdrawal penalty if they are withdrawn after age 59 1/2 (or on account of death, disability, or to pay certain home purchase expenses) following a five-year holding period in the Roth IRA.

. Portable Account with Voluntary Contributions. Savers will have the option of keeping the same account when they change jobs and can directly transfer or roll over the balance into a private-sector Roth IRA at any time. In addition, savers working for more than one participating employer at the same time will be able to contribute to the same account by payroll deduction from each employer.

. Eligible for Saver's Credit. Savers with income below certain levels - currently $60,000 for couples and $30,000 for individuals - will be eligible to claim a saver's tax credit for their myRA contributions because the saver's credit applies to contributions to IRAs. The saver's credit, which ranges in amount from 10 percent to 50 percent of a saver's first $2,000 of contributions each year, provides an added incentive for lower- and moderate-income individuals to save through myRAs. (This incentive could be strengthened by making the saver's credit fully refundable and raising the eligibility income threshold to cover millions of additional moderate-income taxpayers, as well as by raising the credit rate to a uniform 50 percent and simplifying the current three-tier credit structure.)

. Promoting Financial Capability. The myRA initiative can complement financial education and counseling to help workers plan and save for their futures. As Treasury develops and implements myRAs, we will look for opportunities to use them to promote financial education and capability.

Continued Commitment to Automatic IRA Proposal

The Administration remains committed to its proposal for automatic IRAs and encourages Congress to enact it. (A description of that proposal from the Department of the Treasury'sApril 2013 General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals is attached as an appendix to this written statement.) Until Congress acts, we believe that meaningful steps can be taken administratively and by plan sponsors to give workers better access to easy and convenient retirement saving opportunities. The myRA initiative is such a step. n2


The Administration and the Department of the Treasury are committed to expanding and enhancing retirement security and retirement saving, particularly for lower- and moderate-income American workers. To that end, much remains to be done, including, among other things, promoting more lifetime income in both defined benefit and defined contribution plans, facilitating portability and consolidation of retirement savings, encouraging employers to employ behavioral strategies to make 401(k) plans more automatic and effective, and extending coverage to the tens of millions of workers not currently in the system. We believe that the myRA initiative is one meaningful step in that direction. It is designed to help more lower- and moderate-income households save for retirement, providing a simple, safe, and affordable way to begin a lifelong habit of saving. n3 In addition, we continue to encourage Congress to enact an automatic payroll deduction IRA program that will open a route to even more significant improvement in retirement security for American workers, helping to promote a culture of saving and a nation of savers.

We welcome the opportunity to work with the Committee to achieve these important objectives. Thank you, and I look forward to answering your questions.

n1 Significant portions of this written statement incorporate language from statements and other informational documents previously issued by the Department of the Treasury or the Administration, including General Explanations of the Administration's revenue proposals that accompany the Administration's annual budgets.

n2 Proposed automatic IRA legislation provides for a Treasury retirement bond to serve as a kind of fallback destination to which employers could, if they wished, send employee salary reduction contributions (For example, some employers might prefer a retirement bond to avoid choosing among private sector IRA providers.) Treasury's experience in developing a new retirement savings bond under the myRA program will be useful in developing and implementing this kind of option under automatic IRA legislation. See Automatic IRA Act of 2013, H.R. 2035 (sponsored by Rep. Richard Neal (D-MA)).

n3 Individuals and employers are invited to visit or call (800) 553-2663 for more information about myRAs.

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Source: Congressional Documents & Publications

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