How would you assess the private, voluntary workplace savings? Is it working well overall?
Our private workplace savings system – 401(k)’s and the like – is a huge success story – for most Americans. But it is also a major challenge for millions of workers and for our policy-makers in Washington.
What we have is a partially successful system of workplace savings — which is doing very well for those who are fully taking part. And we know what the key variables are that make for success.
By “success” — I mean the many millions of Americans who enjoy access to payroll savings deduction plans on the job – AND whose employers have adopted the best practices of modern plan design – namely automatic enrollment, automatic savings escalation and deferral rates of 10% — or more.
These people are on track – at the median – to replace over 100% of the incomes they earned while working – and enjoy those income for life. That’s what success look like.
The problem is that tens of millions of Americans lack any access to savings plans at work – and many millions of others work for companies that don’t use automatic plan designs. So they are not able to save enough to ensure income replacement in retirement.
To close that gap, we need serious action from Washington. We need to make on-the-job savings options available for every worker – and to prod, encourage or even require that every workplace plan adopt full-auto design and 10%+ deferrals. The solution, frankly, is that simple.
If we don’t do it – we will see a major rise in elderly poverty. The good news is that if we do solve the retirement challenge, we’ll also help fuel investment, robust capital markets and a new era of American prosperity.
What do you see as the single greatest challenge in the workplace savings system – and what is the solution to that challenge?
The biggest single challenge is the “coverage” or “access” issue – the fact that more than 50 million Americans have no access to payroll savings plans on the job. There are several reasons why closing that gap is job one for retirement policy in the next Congress. The first is that most people who lack access to payroll savings don’t save anything.
Surveys by the Employee Benefit Research Institute show that fully 70% of moderate income workers who do have savings plans on the job actually do save for retirement. But among workers at the same income level – but who have no payroll savings plan – only 5% open an IRA.
In other words, workplace savings systems are at least 14 times more effective than purely voluntary action off the job. Clearly, the road to retirement security runs through the workplace.
This is not just the right thing to do – it’s the smart thing to do.
(Learn more about a private solution to encouraging increased workplace savings plans at www.save10.org)
What do you see as the second and third most serious challenges to the workplace savings system. What are the solutions?
Beyond coverage, the second challenge to achieving retirement security is to adopt fully-automatic plan design – universally – in all workplace plans.
By that, I mean the full “auto-package” – automatic enrollment and annual re-enrollment, automatic savings escalation, automatic rebalancing – and the use of proven default investment choices like lifecycle or balanced funds.
The third challenge is to take savings escalation to 10% or more. The sheer level of savings is the most dominant variable in reaching retirement readiness. I defined that as accumulating enough money to replace pre-retirement income for life. This simply can’t be done with savings rates or 3%, 5% or even 7% — which is what the workplace system averages today.
We need to tell people the hard truth. Retirement today is a long haul. You need to put away a lot of money to avoid serious stress.
How can we spread these “best practices” more rapidly across the whole workplace savings system?
We need to pull every possible lever. Education, communication and peer pressure will help spread the word. I certainly do that every chance I get. Competition for talent may also encourage more employers to go full-auto. Regulators, too, could offer stronger guidance in support of fully-auto plans with high deferrals.
But to really move the dial, we will likely need new legislation to speed the spread of these best practices – much as the Pension Protection Act of 2006 helped kick-start their adoption.
We will likely need to offer employers who adopt fully automatic plans even more generous tax incentives – especially if they provide their employees with savings “matches.” Plan sponsors who go full-auto and lift savings to 10% or more should also be given strong legal safe harbor protection against litigation.
What can we do about the emergence of millions of part-time and contract workers – the so-called “gig economy” – how can we help these workers get engaged in saving for retirement?
This is a tough issue to come to grips with because these workers don’t have typical or regular paychecks we can deduct savings deposits from. One answer may come from technology.
I can imagine a sort of “Uber-IRA” or “Uber 401(k)” — whereby contract workers could sign up with a robo-advisor and agree to have maybe 10% of their income sent on to a retirement savings account anytime they get paid.
I also think Congress should consider providing generous matching tax credits – say 50% up to the first $1,000 saved – to encourage young contract workers to get started on retirement saving.
Remember: every dollar we encourage someone to save for retirement is one less dollar they will need many years from now in means-tested help. So I think that we should focus our fiscal support for retirement on helping people become self-reliant…and enjoy that dignity…so they don’t need to become totally dependent on government aid in old age.
Washington policy-makers may look to cut back on retirement savings incentives in the course of budget or tax reform effort. Why is this a problem and what can be done?
Every time there is a major reform of the tax code – as we last saw in 1986 – the tax incentives that encourage savings come under the budget knife.
Unfortunately, we can expect more of these proposals in the future because the budget rules that Congress uses to make tax policy don’t draw the obvious distinction between savings deferrals – which just postpone taxes – and true once-and-gone tax “expenditures like the tax breaks for mortgage interest – which do not flow back to Treasury.
These totally different tax provisions get lumped together by current methods as if they were equal. And that exaggerates the true cost to Treasury of allowing people to shelter savings in 401(k) plans or IRA’s – but then have to pay taxes on that money when it is withdrawn.
Today’s budget accounting exaggerates those costs by roughly 50% — and makes them a very tempting target.
We need to fix this totally flawed budget process BEFORE the next round of tax reform – so we can make policy based on real arithmetic, not false premises.
When we reform the way we account for savings deferrals to take account of the long-term future tax revenue they create, we will see their “cost” fall dramatically AND we’ll be able to take account of the benefits these savings produce – not just for retirees but for Society and for the government. Those benefits – which again, today’s budget methods don’t take any account of – are enormous.
Retirement savings fuel our capital markets and overall economic growth. And every dollar saved is one less dollar that the government will have to pay to that retiree from means-tested programs like Medicaid.
In effect, the American peoples’ savings actually form a buffer not just for them – but for the government – against dependency. You have to deliberately “spend down” these savings before you can qualify for means-tested aid.
The fact is that national and personal solvency actually re-inforce each other. We should never pit one against the other.
That’s why we believe it is economically, socially and morally better to help people save and be self-reliant instead of discouraging savings and forcing retirees to rely exclusively on government programs.
This Conversation was Adapted from a Q&A for FundForum USA. Robert L. Reynolds is President and Chief Executive Officer of Putnam Investments and President of the Putnam Funds.