Wednesday, January 29, 2014

A Quick Note on the myRA Program Announced By President Obama in the State of the Union Address

The President’s State of the Union Address yesterday was better than most of these speeches, particularly because it did not have a long laundry list of proposals and initiatives mostly of interest to a particular cabinet member and the people or institutions directly affected. There was nothing much surprising in it, except for one, perhaps, small item – the announcement of a new investment vehicle for individuals. This is called myRA, which stands for “My Retirement Account.” It is only available for individuals with annual income below certain amounts who are employed by participating firms which do not offer a retirement plan. More details are in this Treasury “Fact Sheet.”   
What caught my attention was the interest rate. It will be the same as that paid by the Government Securities Investment Fund of the Thrift Savings Plan for federal employees (the “G-Fund”).

This is a good deal for a safe investment which has neither credit nor market risk. The interest is determined monthly by averaging the interest rate on conventional marketable Treasury securities with a remaining term of maturity of four years or more. Since the yield curve is usually positively sloped (i.e., long-term interest rates are higher than short-term rates), this is an attractive rate for an essentially riskless investment.
Of course, some banks pay rates on federally-insured savings accounts which are significantly higher than T-bill rates for money that can be pulled out at any time. The banks are willing to do this because from experience they know that this is a stable source of funding; money put into savings accounts tends to stay there for relatively long periods. Of course, the banks can change their rates anytime they want to. The Treasury would have more difficulty in changing the way the interest rate is determined.

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