With the rollout of the Republican Party’s tax reform proposals expected this month, chances are high that incentives for retirement savings will be threatened as they were in 1986 or when an abortive tax reform package was floated in 2014. This year may prove no different. Faced with the need to find “savings” that can keep a tax reform “revenue neutral,” budget negotiators tend to view cuts to the “tax expenditures” that drive savings as convenient “pay-fors.”
This inclination to pit personal solvency against national solvency is at best a gross policy blunder. But it does reflect the widespread misunderstanding in Washington of just how crucial America’s $27 trillion retirement savings pool has become, not just to retirees, but to our whole economy. Before we adopt any major tax reform, we need to recognize that our workplace savings systems is not just the source of income for future retirees. It has become a vital supplier of the patient, long-term capital that fuels our stock and bond markets and drives our economy’s growth.
Nearly 40 percent of all workers lack any payroll savings option on the job. Roughly one-third of American workers have no retirement savings at all. And among those who do have job-based savings plans, too many put too little aside to reliably replace their earnings once they leave work. Yet the media’s drumbeat of stories about shortfalls and a looming retirement “crisis” actually stir up exaggerated fears and paralyzes needed reforms. It ignores the extraordinary strengths of our retirement finance structure.
The reality is that America has evolved a very robust, “two-stroke” retirement finance “engine” that links public Federal Insurance Contributions Act taxes on wages (labor income) with dividends, interest and capital gains (capital income) from workers’ private investments in our capital markets. Together, Social Security and workplace savings reinforce each other. They offer a well-balanced “diversification” of income sources that we can build on and dramatically improve.
Today, savings plans that automatically enroll workers, then automatically escalate their savings to bring them up to rates of 10 percent or more, are already enabling tens of millions of workers to replace 100 percent or more of their work-life incomes. That’s success by any measure, and it depends, above all, on wise plan design, not income. Millions of low and moderate income workers are on track for secure retirement, precisely because the designs of their savings plans make success easy and failure hard. Let’s spread that proven model system-wide.
If Congress would act to ensure savings coverage to all workers, not just some, and support the adoption of successful plan designs, we could solve most of this country’s retirement challenge just by building on and upgrading 401(k)s and other payroll savings plans we already have. The financial and fiscal payoffs of doing that that would be enormous. A 2014 study from Oxford Economics, sponsored by a coalition raging from the U.S. Chamber of Commerce to AARP and the Aspen Institute, found that by offering savings plan access for all American workers and lifting their savings rates to 10 percent and above, the nation’s growth rate and economy could rise by trillions of dollars by 2040.
The study’s bottom line message is clear: Any policy that cuts savings also slows growth, and any policy that raises savings also raises growth. If Congress comes together this fall across party lines to recognize the true value of raising savings as they discuss tax reform, we have it in our power to turn a potential retirement “crisis” into an engine for growth, hope and perhaps even cross-party trust.
Robert L. Reynolds is president and chief executive officer of Putnam Investments and Great West Financial, owner of Empower Retirement, which serves more than 8 million retirement savers. He is the author of the new book “From Here to Security: How Workplace Savings Can Keep America's Promise.”