WASHINGTON — President 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.
‘‘We think this fills a space that, very importantly, we can do by our own authority,’’ Treasury Secretary Jacob Lew told reporters on Wednesday.
The plan is a response to a looming retirement crisis. Companies have largely abandoned traditional pensions. Social Security is being strained 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.
Savers could take the accounts with them when they change jobs and could roll the savings over into another private-sector account at any time.
Below, a closer look at how the new program works, why the White House says it is needed and whether specialists think it will make much difference:
Q. How would myRA work?
A. 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.
Q. Is this a safe investment?
A. The accounts would be backed by the US government; the principal would be protected from loss. The returns are pretty good for an investment that is risk free (except for inflation): The Government Securities Investment Fund myRA is pegged to yielded an average 3.61 percent a year from 2002 to 2012.
Q. Are participants locked into the program once they start?
A. They could 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,’’ says 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 — $6,500 for those 50 and older. When the balance reaches $15,000, the savings would be transferred to a private sector Roth IRA.
Q. What problem is myRA designed to solve?
A. 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.
Q. How much will myRA help Americans prepare themselves for retirement?
A. Retirement experts are underwhelmed. ‘‘It’s just a start. It is by no means a solution on its own,’’ says David Madland, of 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. 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,’’ says Teresa Ghilarducci, a retirement specialist at the New School for Social Research in New York.