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PUERTO RICO REPORT
The Drawbacks Of Saving For Retirement In Puerto Rico
by Lance Oliver
July 14, 2000
Economists and, less often, political leaders, fret about Puerto Ricos negative savings rate and growing number of personal bankruptcies. Is the public sector doing what it should to encourage less spending and more investing?
The tax exemption on the first $2,000 of interest income from local banks is a good start because it rewards small savers, but it doesnt seem to be enough to send many people to the bank with cash in hand instead of to the malls.
For those in the minority who are trying to be financially responsible, the halfway point of the year brings another reminder of the government policies to encourage savings, specifically for retirement. The quarterly reports on IRAs (Individual Retirement Accounts) held by thousands of Puerto Ricans are slipping into mailboxes this time of year.
Its not hard for many people to look at the results and say its just not worth it to plunk money into IRAs. Maybe we should just buy that new car instead.
While IRAs do provide a tax break at filing time, the returns on the money invested in Puerto Rican accounts pales next to the possibilities for investors in the 50 states.
For investors who are near retirement or for those who only sleep well at night knowing their money is conservatively invested, Puerto Ricos restrictive rules on IRAs are not an issue. But for middle-age, middle-class people, the ones most likely to take advantage of IRAs, the local rules are a deterrent instead of a reward for prudent investing.
First of all, a brief look at the restrictions: the most aggressive position an IRA investor in Puerto Rico can choose is to divide the account among bonds, stocks of local companies and stocks of U.S. companies. More conservative options, all the way down to FDIC-insured certificates of deposit, are also available.
In the 50 states, there are no such restrictions and financial planners typically counsel people who are more than 10 years away from retirement to be 100% invested in stocks.
A young person in Puerto Rico does not have the option of investing aggressively and letting the advantage of a long time frame boost his or her retirement savings.
Instead, the person who chooses the most aggressive option available finds that all three segments of the portfolio have weaknesses:
First, the bonds do not provide growth the way stocks would.
Second, the basket of local stocks available to investors is limited, leading to a less diversified portfolio. The investor who thinks its a good time to avoid financial stocks, for example, hardly has any alternatives for investing in Puerto Rican companies.
Third, because there are only a few firms offering IRA investments in U.S. stocks, local investors have few choices while stateside investors can choose among thousands of mutual funds or can invest directly in equities themselves. Younger investors in Puerto Rico can easily find that even the most aggressive option for the U.S. equities portion of their account is still pretty tame and doesnt offer the growth possibilities they might want.
Encouraging middle-class people in their 20s, 30s and 40s to save for their retirement makes sense.
A financially comfortable retirement means a lot to them as individuals and it is also important for the economy and the government, which is why IRAs are encouraged with tax breaks. If todays middle class ends up tomorrows poor, they place more stress on government services, as well as their families.
The poor arent likely to save at all and the rich have other options. For most middle-class families trying to pay the mortgage (in an expensive housing market), pay private school tuition (because they dont trust public schools) and pay two car loans (because both parents work and theres no reliable public transportation), putting a little aside for retirement is not easy. Many of them wish that the government that doesnt provide good schools and public transportation would at least allow them to get a good return on the tiny nest egg they can afford.
Of course the government has other goals in mind. It wants to force people to invest locally. Some legislators estimate that $30 billion of local wealth is invested outside Puerto Rico by island companies and individuals.
But a variety of tax incentives in addition to the IRA restrictions have yet to create the kind of local capital market many would like to see to lure some of that money home.
Meanwhile, what about those who wont have quite as good a retirement because their savings didnt grow? What about the investments they wont be able to make then?
No one blames IRA rules for the level of debt and bankruptcy in Puerto Rico. But they dont encourage saving your pennies as strongly as they might, either.
Lance Oliver writes The Puerto Rico Report weekly for The Puerto Rico Herald. He can be reached by email at: email@example.com.