Workplace Retirement savings

Workplace retirement savings: An enduring stimulus for the U.S. economy

Robert L. Reynolds

With the first major tax reform of the past generation now a fact of political history, the next big idea on the agenda centers on a trillion-dollar infrastructure spending bill that would aim to upgrade America’s frayed transportation and telecommunications systems and stimulate the economy.

Given the major federal government budget deficits foretold by the new tax package, it remains to be seen where the government would raise the vast sums required by such an infrastructure overhaul. But what if there were another way to inject tens of billions of dollars into our economy through productive private investment without resorting to government borrowing?

The U.S. workplace savings system generally fails to garner sufficient credit when it comes to public policy discussions and the media. U.S. retirement assets comprise in excess of $27 trillion (over $16 trillion in workplace plans and IRAs), accounting for 75% of global retirement assets as measured by Willis Towers Watson in its 2017 Global Pension Assets Study. Despite this success, policymakers and the media tend to focus on the fact that only half of American workers consistently participate in this system. And this is a legitimate criticism.

On the investment side of the conversation, we spend a lot of time discussing swashbuckling hedge fund and private equity investors, but hedge funds and private equity – worldwide – manage “only” $7 trillion, with a substantial part of those assets actually owned by defined benefit pension plans.

So, let’s give credit where it’s due – to the American workers and their employers who have, over the last generation, toiled and invested, building a solid foundation for American capital markets and the economy as a whole.

Private savings – The best kind of stimulus

Of course, we still have much work to do. Our national savings rate, which topped 10% in the early 1970s (albeit during a time of high inflation), declined for decades, collapsed precipitously during the global financial crisis, and is today stuck in the mid-single-digits and projected to continue declining over the next generation.

Economists generally agree a healthy range of investment for the economy would equal 20-25% of GDP, and this level of investment can really only be achieved through savings or debt – with private investment widely preferred over government indebtedness. The only way to achieve a national investment target of 20-25% of GDP over the long term, then, would be through enhanced, sustainable economic growth.

American economic growth, in tandem with our steadily declining levels of savings, has been falling for decades, however. While it grew at a rate of roughly 4.5% a year in the 1960s, 4% in the 1970s, some 3.5% in the 1980s and just 2% in the 20 years from 1990-2010, most recently U.S. economic growth has been nearly 3% in response to synchronized global economic recovery nearly 10 years after the financial crisis and in anticipation of U.S. tax reform and deregulation.

Where we go from here is uncertain, but we do know that in order to sustain economic growth, we need steady, dependable flows of public and private investment. We also know private retirement savings represent just the kind of multi-decade “patient” capital this need demands.
In the 2015 study “Another Penny Saved: The Economic Benefits of Higher US Household Savings,” which was sponsored by the AARP, American Society of Pension Professionals & Actuaries, Aspen Institute, US Chamber of Commerce, and Putnam Investments and other financial services firms, analysts at Oxford Economics concluded a consistent program of increased private savings would narrow our investment gap, reduce debt, diminish U.S. dependence on foreign capital, ameliorate American wealth inequality and increase our GDP by some 3% by 2040, which is equivalent to about $3,500 per person in today’s prices.

Workplace savings can play a vital role in this challenge. If we can substantially increase the level at which American workers save and increase the number of workers participating in workplace savings programs, we could effectively inject tens of billions of new annual flows into our capital markets. At the same time, we could build retirement savings for American workers and their families – all without increasing public indebtedness.

Numerous policy initiatives are maturing in Washington and in state capitals nationwide that could enhance this effort.

  • Several individual states – notably Oregon, Illinois and California – have taken the initiative to establish government-sponsored savings plans for private sector workers in small companies that do not offer 401(k) plans. Other states are establishing state-level “exchanges” through which workers can shop for savings plans. These efforts are beginning modestly … as did our 401(k) system many years ago. But within only a few years, these plans could drive tens of billions of dollars to U.S. capital markets each year.
  • Proposals to establish this kind of savings infrastructure at the national level have long been stalled, but a national “auto-IRA” – basically a federal version of the state plans, with all the economies of scale that a national solution implies – is still very much under discussion. Many believe a national auto-IRA could serve as a critical “starter program” for lower-income workers at small and mid-size enterprises that have fallen through the cracks of the 401(k) system.
  • The highly regarded Thrift Savings Program (TSP), the 401(k)-style plan for federal government workers with some $500 billion under management, is already the largest defined contribution savings plan in the world. And it is about to get a lot bigger. In what is being called the most significant update in U.S. military pension and benefits since World War II, 1.6 million current active-duty, Reserve and National Guard personnel can, as of 2018, participate in a new “blended retirement system” that combines the military’s traditional defined benefit pension system with a 401(k)-style plan. This change promises to measurably increase monthly TSP flows into U.S. stock and bond markets.
  • Finally, Congress is considering long-discussed proposals for open multiple-employer plans (MEPs) that would allow small employers to band together to sponsor private workplace savings plans. The proposal, which has bipartisan support, would help mitigate the cost and administrative burdens of workplace savings plan sponsorship, extending the benefits of popular 401(k)-style plans to a whole new cohort of American workers – particularly in small companies, where most new jobs are being created.
graph showing pension assets versus GDP

America’s workplace savings plans are a wages-to-wealth mechanism that ties individual workers to the larger economy in a manner being adapted all over the world. Expanding these programs could not only shore up household retirement finances. They could also generate a classic feedback loop of expanded savings and capital formation, accelerated GDP growth, new hiring, rising wages, increased savings, and yet more growth – all to the benefit of workers and their families as well plan sponsors and securities markets.

Far more than a simple stimulus, an expanded workplace savings system would drive permanent, ongoing and sustainable investment flows into the heart of the American economy.

Opinions, estimates and statements of financial market trends that are based on current market conditions, constitute our judgment and are subject to change without notice.

Author

More by this author