As we boomers approach our golden years, the outlines of America’s retirement savings challenge are becoming clearer by the day. Roughly half of Americans are well-prepared and participating in workplace retirement savings programs or traditional defined benefit pension plans that together account for some $27 trillion in assets.
But however impressive this is (and it is), it also means that nearly half of all working Americans face difficult prospects and will depend on mostly on Social Security, spousal benefits, bank accounts, or home equity withdrawals in retirement. Where workers land across this stark divide depends on whether or not they have participated in workplace savings plans. And that, in turn, is largely determined by their level of education, their incomes and the size of the firms where they work.
Michiganders know this challenge all too well. In the Wolverine State, only 48 percent of workers with a high school degree have access to workplace savings plans, (as compared with 60 percent of workers with a university degree or higher). Fewer than one-third of workers making less than $25,000 per year have access (as compared with 71 percent of those making more than $64,000) and only 30 percent of those working at Michigan companies with less than100 employees have access to any form of workplace savings (as compared with 71 percent of those with 1,000 plus). This is a challenge for Michigan — and for the nation. We must close this “access gap” to on the job savings as a matter of national priority.
As daunting as this prospect may be, we face another challenge that is much larger by an order of magnitude. The U.S. rate of economic growth has been declining for 50 years and government entitlement spending has been steadily rising over the same period. We face a fiscal crunch of epic proportions. Sometime between 2030 and 2040 “mandatory” federal entitlement spending and debt payments are projected to actually exceed total tax revenues.
Yet this challenge also represents an extraordinary opportunity. Because the path to resolving retirement finance — by significantly raising national savings — leads directly to a dramatic enhancement of our rate of economic growth. If we get it right, providing a sound foundation for American retirement finance would generate a classic feedback loop of rising workplace savings, expanded capital formation, growing securities markets, accelerated GDP growth, followed by a boom in hiring, beginning the cycle again.
This isn’t an abstract concept. In my new book, “From Here to Security,” I outline a concept we call Workplace Savings 4.0 — a deepening of retirement savings by workers in 401(k)-style workplace plans to 10 percent of salary and an extension of plan coverage to millions of new workers through Auto-IRAs and collective Multiple Employer Plans (MEPs). This could significantly lift worker investment flows to U.S. stock and bond markets, with positive impacts on U.S. economic growth and government fiscal stability.
For example, the Employee Benefit Resource Institute (EBRI), estimates that the advent of Workplace Savings 4.0 could halve our retirement savings shortfall, generating $700 billion in new annual investment flows within three years, adding some $5.5 trillion to America’s retirement savings pool by 2025.
Perhaps more intriguing, Oxford Economics, in a study entitled “Another Penny Saved,” sponsored by Putnam Investments, the AARP, the U.S. Chamber of Commerce and other partners, estimates that this kind of expanded savings rate could actually add trillions to America’s GDP by 2040 — and thousands of dollars per capita to individual 8incomes. Economic growth, like interest, compounds. One percent growth takes 72 years — a lifetime — to double GDP. But at 3 percent, GDP doubles in just 24 years.
In life, opportunities are sometimes disguised as “insoluble” problems. America’s retirement challenge is just such a case. Workplace savings plans today are powering the U.S. economy. Protecting them, and growing them substantially, promises to simultaneously resolve our stubborn deficits of both retirement finance and economic growth, directly benefiting tens of millions of American workers and their families. So let’s act to raise savings now. Let’s go from here ... to security.
Robert L. Reynolds is president and CEO of Putnam Investments and Great West Financial, and owner of Empower Retirement.