Four decades after the creation of the 401(k), the new Congress that convened this week will have the chance to pass the most significant retirement savings reform in years. Multiple bills that will be introduced early this year could open on-the-job savings options for millions more workers by allowing multiple employer retirement plans to form across industry lines, by companies as diverse as hair salons and oil-rig leasing firms.
That would help close a yawning coverage gap in small-business savings coverage, a major leap forward for a workplace system that has grown over the past 40 years to become a vital element in most Americans’ lives. Yet few of us — and far too few top policy makers — fully grasp how much workplace savings have achieved, or imagine how much more this system can contribute.
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The truth is that retirement savings in America do far more than just help provide post-retirement income. Workplace savings have become an indispensable source for American capital formation generally. Paycheck by paycheck, tens of millions of workers fuel the world’s most robust capital markets, power-driving innovation and growth. What’s more, anything we do to increase access to workplace savings promises to yield vast fiscal benefits for the government itself over the long term.
Consider this: Over the past two generations, through 401(k)s, IRAs, defined-benefit pensions, and other savings vehicles, working Americans have compiled over $28 trillion in retirement savings. That is well over one-third of the $72 trillion capitalization of all stocks and bonds in the country. These savings form the largest dedicated asset pool on earth. No other nation’s retirement savings even come close.
In fact, the sheer scale of Americans’ retirement assets spurs envy among competing nations around the world who are struggling with aging populations and still depend mainly on tax-based pay-as-you go retirement systems, most of them facing severe fiscal and political crises just in the next few years.
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So despite the well-known — and very serious — shortfalls in American retirement finance, the buildup of these assets is a huge success story. Better still, 40 years of 401(k) experience gives us all the insights we need to identify what works, spread those best practices systemwide, and actually solve our savings challenges.
Job one is to provide all American workers access to payroll deduction savings plans on the job — by law. Secondly, these plans should be made fully automatic — with an “opt-out” option — from enrollment to annual reenrollment, automatic savings escalation of 10 percent or more, and access to advice and guaranteed lifetime income options on retirement. These basic reforms would optimize what private workplace savings can achieve and set most workers on a path to lifetime income security.
The good news is we are moving in that direction.
Savvy politicians in Washington increasingly recognize two highly motivating facts. First, that Americans are worried — very worried — about their retirement futures. Second, voters love proposals that make it easier and more rewarding for them to save.
This means that 2019 and coming years will surely see a wave of legislation provide access to job-based payroll savings for tens of millions more workers, who will bring trillions more into workplace savings plans. Over time, this will take America closer to a true “people’s capitalism,” in which nearly every worker can earn a tangible, growing equity stake in our free enterprise system.
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Legislation soon to come before Congress would take us far along that road. And the benefits would be striking.
Here’s why. We can already see that mass investing by over 80 million current workplace savers has made America’s capital markets the deepest and most liquid on earth. And having such powerful capital markets qualitatively lifts our capacity to innovate and win in global markets.
That’s because capital markets are far more nimble in funding innovation than the bank-centered financial systems that dominate most of Europe and North Asia. For example, banks can’t risk making loans to 10 startup companies, in the hopes that one of them will multiply 20 times in value even if the others fail. But those are precisely the kinds of bets that capital markets make possible — across the full spectrum, from angel investors to venture funding, to IPOs, and bond market issues.
The hundreds of billions of dollars that flow into and out of capital markets from workplace savers play a vital, if indirect, role in keeping our equity markets liquid enough to absorb a steady flow of initial public offerings, which are far more common in America than most of the world. This option to “go public” is what angel and venture financiers invest to achieve: the pot of gold at the end of the venture rainbow.
Absent the depth and liquidity that workplace savers fund, America’s capital markets would be far less able to fund innovation. I would suggest that America’s capital market strength is why the most innovative technology companies of the past generation have been born and raised in the United States, not in bank-centered financial systems like those found in Japan, Germany, Korea, or France.
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As understanding of this savings/innovation link grows, more and more far-sighted policy makers recognize that higher retirement savings can not only lift economic growth rates, but also raise government revenues and mitigate long-term fiscal pressures.
After all, every dollar of retirement savings is one less dollar that an individual or family will ever ask from the government in the future. So although the American people’s $28 trillion in retirement assets belong to them personally, these assets also protect the government from future claims on means-tested assistance programs like Medicaid. Personal solvency and national solvency actually reinforce each other.
Congress, the media, and thought leaders should look at retirement savings policy through a new lens and see these savings as a vital element in a larger national growth strategy. Too few, even now, realize what we’ve achieved, but America’s globally unique workplace savings system has become a dynamic engine for capital formation, growth, and American competitiveness.
Starting Thursday, the incoming Congress has the chance to take it to the next level.
Robert L. Reynolds, president and CEO of Putnam Investments and Great-West Financial, is the author of “From Here to Security: How Workplace Savings Can Keep America’s Promise.”