How America’s retirement savings system needs to change
If you’re young and working paycheck to paycheck, saving money decades into the future might not be the most pressing thing on your mind. But it’s important to have financial security when you retire, which is becoming a growing problem for Americans. One-third have nothing saved once they leave the workforce.
That’s something Robert Reynolds, president and CEO of Putnam Investments, wants to help change. He recently co-wrote a book called, “From Here to Security: How Workplace Savings Can Keep America’s Promise.”
He stopped by Marketplace Weekend to discuss how America’s retirement savings system has changed over the years and why you need to start saving.
1) A shift from pensions to 401(k)s
America’s retirement system has largely moved away from defined benefit plans, like pensions, to defined contribution plans like 401(k)s. With defined benefits, you’re promised a set amount of money each month after you retire, while a defined contribution plan has you fork over your own money (though your employer may match the percentage you put in).
The pension system’s defined benefit only covered about 30 percent of working Americans, and was great — as long as you remained with the company for decades.
“It was a very efficient way to provide for retirement if people stayed on the job 25, 30, 35 years. But America changed,” Robert Reynolds said. “The average American has 12 jobs during their career, and defined benefit does not work in that environment.”
Reynolds said Americans started using 401(k)s back in the early ’80s, and the number grew over the years — especially with the creation of the Pension Protection Act of 2006, which had provisions that encouraged automatic enrollment.
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2) The case for saving for retirement
Saving even just a portion of what you earn can make a difference.
According to a study, if you’re saving 10 percent of an income and have a targeted fund — a type of fund consisting of stocks and bonds based on your age and retirement date — you’ll be able to replace your income upon retirement, Reynolds said.
“You have the availability to see that money grow before you — the power of compounding,” he said.
And target funds are appropriate for you throughout your work life.
“It becomes a very simplified way for people to invest,” Reynolds said. “And that’s why it’s so popular.”
3) Taking the gig economy into account
Companies like Uber and Airbnb have exploded, leading to a rise in the number of independent workers. So Reynolds said we should have a multiemployer plan for companies contribute to on a regular basis.
Workers could have a vehicle where they’d always be able to place their money (pretax, growing tax-free) and be able to take it out at retirement, Reynolds said.
“That would be the solution for the gig employee — to provide a vehicle for them to save just like workers do that have a workplace savings available to them,” he added.
4) The future of our retirement savings
Reynolds said he’d need some support in Washington to develop a multiemployer plan, but how possible is it given our political climate?
“I do think it’s very possible politically, because retirement issues cut across party lines,” Reynolds said. “It’s to the country’s benefit, because every dollar an individual saves on their own is one less dollar they expect from the government.”
But as we think about hypothetical changes to our retirement savings, there are existing parts of it that may be in danger, like Social Security.
When Social Security first came out in the ’40s, the retirement age was 65. But life expectancy has increased, changing the game. And if there’s no change to the Social Security system by the 2030s, we’ll have to cut benefits by about 30 percent, Reynolds said.
“It’s something that will take political courage to go after,” he added. “To me, it will be there, but changes have to be made in the system.”
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