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8/3/2019 Putnam Perspectives: Savings, Solvency and the American Promise
1/12
PUTNAM INVESTMENTS | putnam.com
I think we all know in our bones that America is at a critical inection point. We reall
do ace a choice between decline and renewal. I we want to keep the American
promise o a better lie or our children, we absolutely must make a transition awayrom public debt, leverage, and excessive debt-ueled consumption to a new
economic model based on higher personal savings, public solvency, more invest-
ment, more exports, more new business ormation, and more rapid job creation. Th
wont be easy, but the alternative is worse. The status quo course were on right now
is dangerous and unsustainable.
The road to insolvency
Since the turn o this new century, Americas scal health has taken a drastic turn o
the worse. Back in the good old days o 2000, the Congressional Budget Oce [CB
projected that by 2011 ten years o record ederal surpluses would turn the ederaldebt into a net surplus o $2.3 trillion dollars thats the alling debt line we see in
Figure 1 as the national debt is paid down past zero! You may remember that some
people actually worried about what might happen i the ederal government didnt
need to issue any new debt. Well, were not losing sleep over that anymore, are we?
Americas debts have
put us on the road toinsolvency
Our workplace
retirement system
provides a great base for
increasing our savings
Now the target of budget
scrutiny, retirement
savings incentives can
actually help keep the
American promise
November 2011 Putnam perspectives
Savings, Solvency, and the
American PromiseRobert L. Reynolds
President and Chie Executive Ofcer
I we want to keep the American promise o a better lie or
our children, we absolutely must make a transition away rom
public debt, leverage, and excessive debt-ueled consumption
to a new economic model based on higher personal savings,public solvency, more investment, more exports, more new
business ormation, and more rapid job creation.
http://www.putnam.com/8/3/2019 Putnam Perspectives: Savings, Solvency and the American Promise
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2
NOVEMBER 2011 | Savings, Solvency, and the American Promise
Figure 1. A lost decade o decits uels a surge in Americas national debt
-2
($) 10
8
6
4
0
PUBLICLY HELD FEDERAL DEBT ($T) Actual debt 20002011$10.2 trillion
CBO projected debt-$2.3 trillion
(CBO, January 2001)
debt
surplus
2
2000 2005 2011
$12.5T
Source: Pew analysis o Congressional Budget Oce (20012011) data.
What happened? History took us by surprise. Instead
o big surpluses, we had a decade o decits, liting the
national debt held by the public to over $10 trillion by
2011, $12.5 billion more than the CBO had projected at
the start o the new century. There were multiple causes
or that, including:
Tax cuts under both Presidents Bush and Obama
9/11, the wars in Aghanistan and Iraq, and other new
deense costs
Major new spending on discretionary programs
A new drug entitlement program or seniors
Massive stimulus spending to try to end of another
depression ater the crash o 2008
But the single most damaging cause o these decits,
shown here in red and accounting or more than a
quarter o total decits twice as much as the Bush
tax cuts was the lower revenue ows caused by
slower economic growth, which was well below what the
CBO had projected. In other words, economic growth, or
the lack o it, is the most powerul variable in Americas
scal health.
Unsustainable decits
Today, ederal decits already claim a large share o
our economy, much more than that claimed by top-
rated peers like the United Kingdom, France, Canada,
Australia, and Germany. Our total national debt and
this includes internal government debt like the Social
Security trust unds is on track to reach $15 trillion
by the end o this year. Fiteen trillion dollars is a mind-
boggling number and dicult to imagine.
The single most damaging cause o these deicits was the lower revenue lows caused by
slower economic growth In other words, economic growth, or the lack o it, is the most
powerul variable in Americas iscal health.
8/3/2019 Putnam Perspectives: Savings, Solvency and the American Promise
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PUTNAM INVESTMENTS | putnam.com
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Figure 2. Americas decits now rank among the worlds largest
2010 budget defcit as a percentage o GDP
U.S. U.K. France Canada Australia Germany
10.6% 10.4%
7.0%
5.5%4.6%
3.3%
Note: IMF calculations or the U.S . dier rom Congressional Budget Oce gures, which put the U.S . decit at 8.9% GDP.
Source: International Monetary Fund. All inormation as o December 31, 2010.
As shown in Figure 3, $15 trillion measured in $100 bills would stack up into a solid block o hundreds bigger than a ootball
eld and more than hal as tall as the Statue o Liberty.
Figure 3. Total ederal debt could reach $15 trillion by year-end 2011
Sources: U.S. Federal Reserve and www.USdebtclock.org.
And the orward outlook is worse. The Congressional Budget Oce advises us that President Obamas most recent
budget would raise total national debt held by the public rom roughly 63% o GDP today to more than 90% by 2020, with
no end in sight! That is a debt-to-economy ratio that America hasnt seen since World War II.
http://www.usdebtclock.org/http://www.usdebtclock.org/8/3/2019 Putnam Perspectives: Savings, Solvency and the American Promise
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NOVEMBER 2011 | Savings, Solvency, and the American Promise
Figure 4. Our national debt is on track to reach 90% o GDP by 2020
(%) 200
150
100
50
01930 19501940 19701960 1980 1990 2000 2010 2030E2020E
U.S. FEDERAL DEBT AS A PERCENTAGE OF GDP
Crash
of 2008
148%
Vietnam
War era
World War II
The Great
Depression
22%
108.6% Over 90%
Sources: Heritage Foundation compilations o data rom U.S. Department o the Treasury, Institute or the Measurement o Worth
(Alternative Fiscal Scenario), Congressional Budget Oce, and White House Oce o Management and Budget.
Figure 5. Interest costs alone could nearly quadruple by 2020
$800B
$600B
$400B
$200B
$0
INFLATION-ADJUSTED DOLLARS (2009)
2000 2020
$768.2
$280.1$186.9
Actual Projected
2005 2010 2015
Source: White House Oce o Management and Budget, 2010 estimates.
Simply put, its a path to insolvency. And while this scal
time bomb keeps ticking, interest costs on the debt
are exploding. Unless we change course, those costs
will nearly quadruple by 2020, reaching close to $800
billion a year. This, by the way, is happening at a time o
historically low interest rates. A sustained rise o just 1%
in interest rates would add $150 billion more a year to
this burden. Albert Einstein once described compound
interest as the most powerul orce in the universe.
Were gambling against it, and were doing that with
other peoples money.
We now depend on other countries to nance us
We now depend on oreign creditors to nance nearly
hal o our debt, about ten times as large a share as they
held in 1970. So ar, these oreign creditors still believe
that America can and will get its act together.
Their aith that America will right its course, plus the ear
generated by the even worse nancial mess in Europe,
is the only reason why the U.S. Treasury can still borrow
huge sums o money 10 years out at rates o 3% or less.
But Americas dependence on oreign buyers at our
Treasury debt auctions makes us increasingly vulner-
able. I global investors should ever conclude that our
political leaders are unable or unwilling to deal with our
decits and debt, we could be plunged into crisis by
surprise and virtually overnight.
8/3/2019 Putnam Perspectives: Savings, Solvency and the American Promise
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PUTNAM INVESTMENTS | putnam.com
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We now depend on oreign creditors to inance nearly hal o our debt, about ten times as
large a share as they held in 1970. So ar, these oreign creditors still believe that America
can and will get its act together.
Figure 6. Other countries hold nearly hal o our debt today
Foreign holdings
1970Debt held by public:
$283B
5%
1990Debt held by public:
$2.4T
19%
2010Debt held by public:
$8.4T
47%
Source: U.S. Department o Treasury.
So, the way I see it, America doesnt really have a choice
about coming to grips with its debts and bringing
government spending under control. The real choice we
ace is whether to act or be acted upon by some very
ruthless global markets, the same markets now driving
the sovereign debt crisis in Europe.
The key driver is demographics:
an aging America
Heres the key driver o our decits. America is aging. Lie
expectancy is rising. Baby boomers are now turning age
65 at the rate o about 7,000 a day. Over the next twenty
years, the number o Americans over age 65 will nearly
double, rom 40 million to 72 million.
America doesnt really have a choice about coming to grips with its debts and bringing
government spending under control. The real choice we ace is whether to act or be acted
upon by some very ruthless global markets, the same markets now driving the sovereign
debt crisis in Europe.
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NOVEMBER 2011 | Savings, Solvency, and the American Promise
Figure 7. A nation o retirees
Americans over age 65
40 milliontoday
72 millionby 2030
Source: U.S. Bureau o the Census, August 2008. Most recent data available.
Congress cant vote down this demographic wave; the president cant veto it. We have to deal with the stress it will put on
our old-age support programs, and the longer we delay, the tougher that gets.
Absent reorm, entitlement costs will dominate ederal budgets
Unless we see substantial reorms to Social Security, Medicare, and Medicaid, these three entitlement programs alone
will grow by 2045 to absorb as much o Americas economy as the entire ederal government budget has averaged since
World War II over 18% o GDP.
Figure 8. Absent reorm, entitlement costs will dominate uture budgets
Three major entitlements and tax revenues, 20002050
PrecentageofGDP
Sources: Spending projections rom Congressional Budget Oce, alternative scal scenario in The Long-Term Budget Outlook, June 2009.
So i we want the government to pay or anything else, whether that is the Marine Corps or National Public Radio, we
will have to get serious about curbing entitlement costs and about raising some additional revenues to meet these
demographically driven obligations.
8/3/2019 Putnam Perspectives: Savings, Solvency and the American Promise
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PUTNAM INVESTMENTS | putnam.com
7
The real risk to our creditworthiness is not economic or inancial. We do have the resources.
The real risk is political paralysis, the seeming inability o our two-party system to ind
common ground, to compromise, and to crat a workable solution.
Both political parties will have to make some painul
concessions, which neither seems quite ready to do.It would be tragic, or example, i the current Select
Committee on Decit Reduction does not nd some
common ground and at least meet its target o saving
$1.2 trillion over the next decade. And $1.2 trillion,
by the way, is just 2.6% o the $46 trillion the ederal
government is projected to spend in the next ten years.
My gut tells me that i the Super Twelve ail, there could
be very nasty reactions in global markets. Americas
own leaders would, in eect, be validating the S&P
downgrade we saw this summer.
When you actually read that S&P report, one thing is
crystal clear. The real risk to our creditworthiness is not
economic or nancial. We do have the resources. The
real risk is political paralysis, the seeming inability o our
two-party system to nd common ground, to compro-
mise, and to crat a workable solution.
Enough on the budget context and bad news. I want
to turn now to the positive side o the ledger. And letme suggest to you that action to strengthen Americas
public and private retirement systems, not undercut
them, could play a vital role in reviving condence and
sustaining growth in our economy.
The good news: Our DC retirement system
The good news is that we have created a robust dened
contribution workplace savings system predomi-
nantly 401(k) that reaches more than 83 million
workers. This system has shown to be strong, resilient,and always open to improvement. This suggests to me
that i we can strengthen the dened contribution [DC]
system and extend its reach, we can take huge strides
toward shoring up Americans belie in their own utures.
And theres every reason to believe we can. Because
with the passage o the Pension Protection Act o 2006
[PPA], we transormed the DC system qualitatively,
enabling 401(k) workplace savings to become Americas
primary retirement system.
Figure 9. DC workplace savings ofer a great base to build on
American workers covered
38
48
62
83
40
4239 40
42 42
75
20
35 38
0
25
50
75
100
1980 1985 1990 1995 2000 2005 2008
DB plans
DC plans
(Millions)
Sources: Private Pension Plan Bulletin, Abstract o 2008 Form 5500 Reports, U.S. Department o Labor, December 2010.
Collective Bargaining Status o Pension Plans, Total Participants by Type o Plan.
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NOVEMBER 2011 | Savings, Solvency, and the American Promise
Figure 10. The Pension Protection Act has
revitalized the DC system
$5.5trillion$4.1
trillion
2009 2015
Source: The Asset Management Industry: Now Its About Picking Your
Spots. McKinsey & Company, September 2010.
The DC system is currently being revitalized, and work-place savings are projected to grow to over $5.5 trillion
just in the next ew years. The reason why is that PPA
endorsed three game-changing elements o dened
contribution savings plan design: auto-enrollment,
savings escalation, and guidance to wise asset alloca-
tion. The law also gave plan sponsors who adopted these
best practices strong sae harbor legal protection.
Today, the evidence on these policy innovations is in, and
the good news is we have essentially solved the chal-
lenge o accumulation. We have not ully implementedthe solution not by a long shot but we do know
what works. Recent research by the Employee Benet
Research Institute [EBRI] shows that workers in their 20s
and 30s whose employers adopt auto-enrollment plan
designs will be able to replace between 40% and 60% o
their pre-retirement incomes, just rom their DC plans!
Thats beore you count Social Security, other savings,
home equity, lie insurance holdings, or any other assets
they may have.
Just this summer, in a study that Putnam did with
Brightworks Partners,* we ound that there is a antastic
success story taking place already within the existing
workplace savings world. People who have access to
workplace savings plans and who participate and who
also deer more than 10% have the potential to replace
over 100% o their pre-retirement incomes once you add
in Social Security. There are millions o these people, by
the way, so this is not some reak anomaly. And mostinterestingly, the income o the best prepared is no
higher than that o the least prepared.
This tells me that i we could nd ways to provide all
workers with access to workplace saving, get them to
start saving, and convince them to deer 10% or more, we
could potentially immunize Americas workorce against
the risk o elderly poverty.
But heres the terrible irony that we ace today. Just as
weve discovered how to design workplace savings plans
that can build reliable lietime nest eggs, just as were
recovering rom the black-swan bite o 2008, now
we ace a new potential risk aimed right at the heart o
retirement savings. It stems rom well-intentioned, but
misguided eorts to cut ederal decits.
People who have access to workplace
savings plans and who participate and
who also deer more than 10% have the
potential to replace over 100% o their
pre-retirement incomes once you add in
Social Security.
Retirement incentives should not be
budget items
To understand this risk, you need to see savings tax deer-
rals through a very bizarre lens, the one used by all too
many budget hawks in Washington. Too oten, budget
experts in Washington view the temporary tax orgive-
ness that retirement savers get or putting unds in anIRA, K-plan, or variable annuities as tax expenditures,
orgetting that these assets will be taxed as ordinary
income the minute they are drawn on by retirees.
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PUTNAM INVESTMENTS | putnam.com
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Figure 11. Retirement savings are now in the cross hairs o budget hawks
Major income tax expenditures 2010 to 2014
$0 $100 $200 $300 $400 $500 $600 $700
Deductions for state
and local taxes
Earned income tax
credit
Lower capital gains
and dividend taxes
Mortgage tax breaks
Retirement
savings deferrals
Health benefits
(Billions)
Source: Douglas Elmendor, CBO Director, Testimony to Select Committee on Decit Reduction, September 13, 2011.
Figure 11 shows the so-called tax expenditures that
were submitted in September in testimony beore the
Select Committee on Decit Reduction. As you can see,
retirement savings deerrals or DC and DB plans are
right up there, second only to the tax costs associated
with employer-based health care, and just ahead o tax
breaks or mortgages and capital gains.
So make no mistake. The deerrals that help make work-
place savings and IRAs easible are in the cross hairso budget hawks right now, and they look like a very
juicy target. Thats partly because Congresss current
budget rules allow only a 10-year window to analyze
the impact o tax deerrals. That methodology seriously
overstates the costs to Treasury o savings tax deerrals,
by 55% to 77%, according to expert studies that Amer-
ican Society o Pension Proessionals and Actuaries
itsel developed earlier this year. Whats more, budget
hawks also have no way to take account o any dynamic
benets that savings may bring by lowering the costo investment capital, or example. So its not surprising
that one proposal being considered would cap total
savings deerrals at $20,000 a year or 20% o salary,
whichever is lower.
Now that may not seem terribly menacing. But take my
word or this. I know rom experience that once savings
tax deerrals are on the table, they are in play. The temp-
tation to cut deeply into them is great. That is exactly
what happened in the last major tax code overhaul in
1986, when ceilings or 401(k) contributions were severely
slashed and so many complications were imposed on
IRAs that their growth was stymied or years.
I want to be clear here. We absolutely do need to get
decits under control. But whatever we do to curb
ederal decits, retirement savings incentives shouldbe held harmless. It would be a truly grotesque policy
mistake immoral, in my view to try to curb public
decits by undercutting tax deerrals or private thrit.
Every dollar that retirement savers set aside is one less
dollar that will ever be asked or as government aid
in the uture. Every company that oers a workplace
savings plan is helping to meet a real national need.
And the incentives or workplace savings do encourage
employers, especially o small businesses, to oer
savings plans to low- and middle-income workers, notjust to the owners and their key executives.
We absolutely do need to get deicits
under control. But whatever we do to
curb ederal deicits, retirement savings
incentives should be held harmless.
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NOVEMBER 2011 | Savings, Solvency, and the American Promise
Figure 12. DC tax breaks avor lower-income workers
30% 32%27%
11%8%
18%
23%
52%
0%
20%
40%
60%
Under $50,000 $50,000$100,000 $100,000$200,000 $200,000 or more
Participants with acces s and retirees with acc ount balances
Share of federal income taxes (after credits) paid
Source: American Society o Pension Proessionals and Actuaries, 2011.
Figure 12 shows the distribution o the tax deerrals or
workplace savings by income level, alongside the ederal
taxes that people at these income levels pay. Sixty-two
percent o these tax deerrals go to people earning less
than $100,000, 38% to those earning more. Some on
the political let see this as an unair tax break to the
afuent. But lets compare these tax deerrals again,
let me note these are just postponements, not ull
orgiveness with the ederal taxes people actually
pay. What we see is that while 62% o these tax deerrals
go to those earning less than $100,000, these low- and
middle-income workers pay just 26% o ederal income
taxes. So they get more than twice as large a share o
tax deerrals as the share o income taxes they actually
pay. Thirty-eight percent o the tax deerrals go to those
earning more than $100,000, but these people pay
75% o all ederal income taxes.
In other words, more afuent earners get only about hal
the share o savings tax breaks as they pay in taxes. That
seems pretty air to me. You might even say progres-
sive. My point is this: The potential gains to the Treasury
rom cutting tax deerrals is vastly overstated, but the
damage such caps could inict is vastly underestimated.
Thats because access to workplace savings is the prime
determinant o whether low- and moderate-income
workers save at all.
The potential gains to the Treasury rom
cutting tax deerrals is vastly overstated,
but the damage such caps could inlict is
vastly underestimated. Thats because
access to workplace savings is the
prime determinant o whether low- and
moderate-income workers save at all.
Restricting access to workplace plans would
be harmul
EBRI research tells us that over 71% o workers earning
between $30,000 and $50,000 do save or retirement,
but only i they have access to payroll deduction savings
plans at work. Among moderate-income workers who
lack access to savings at work, ewer than 5% open tax-
advantaged Individual Retirement Accounts. So capping
or eliminating incentives or workplace and other retire-
ment savings could have devastating impact sending
millions o low- and moderate-income workers toward
retirement with essentially no savings.
I trust that everyone will stand with me in opposing any
reduction in savings incentives. Retirement savings
deerrals are not some special-interest privilege we
deend just because theyre good or our businesses.
Retirement savings are a good thing or all Ameri-
cans. They are a source o dignity and sel-reliance or
millions o working people. They are the seed corn o our
economic uture.
8/3/2019 Putnam Perspectives: Savings, Solvency and the American Promise
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PUTNAM INVESTMENTS | putnam.com
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Figure 13. The impact o access o moderate-income workers who save or retirement
71.5%
4.6%
0
20
40
60
80
With access to workplace plan Without workplace plan IRA only
(%)
Source: Employee Benet Research Institute (2010) estimate using 2008 Panel o SIPP (Covered by an Employer Plan) and EBRI estimate
(Not Covered by an Employer Plan IRA only).
Instead o cutting savings incentives, we should be
doing everything we can to expand workplace savings
coverage or the many millions who lack it. We should
be advancing ideas like the auto-IRA payroll deduc-
tion proposal a very reasonable, cost-eective way
to draw many millions o lower-income workers into
retirement savings and give them a stake in our ree-
enterprise system or the rst time ever.
The auto-IRA is a bipartisan idea, by the way, and it
reects what should be a bipartisan consensus: that
national solvency and personal solvency go together.
We should never pit one against the other. We need poli-
cies that oster both. Yes, the struggle to restore scal
sanity in this country is real, as weve just seen. Americas
decits and debt are now dangerous enough to raise a
real national security issue.
Those politicians and special interest groups who reuse
to admit that we even ace a serious scal problem,
or say we dont need to make any serious changes in
Social Security or Medicare, are simply in denial. I theirview wins, they will lead America straight into a glob-
ally driven debt crisis, and then into truly awul austerity
under ruthless market pressure, just as were seeing
happen in Europe.
But there are many elected ocials and policymakers
who are seeking good-aith, bipartisan solutions to curb
ederal spending and bring our decits under control.
This will require both common sense and some very
uncommon political courage in other words, leader-
ship. But the gains we could achieve ar outweigh the
sacrices we are going to have to make anyway, someday.
Instead o cutting savings incentives
we should be advancing ideas like the
auto-IRA payroll deduction proposal a very reasonable, cost-eective way
to draw many millions o lower-income
workers into retirement savings and give
them a stake in our ree-enterprise system
or the irst time ever.
I, or example, we could see real action to make Social
Security solvent, we would also see a huge surge in
condence at home and around the world, proo posi-
tive that Americans can control their own destiny. I wethen link a solvent Social Security system to reorms that
strengthen and extend private workplace savings to
reach virtually all working Americans, we would also be
nancing a new burst o economic growth. And as we
saw when looking at the drivers o our decits, economic
growth is the most critical variable and the best way to
cure our budget woes in the long term.
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NOVEMBER 2011 | Savings, Solvency, and the American Promise
Putnam Retail Management | One Post Oice Square | Boston, MA 02109 | putnam.com
Retirement savings can help keep the American promise
So please, everyone, bring this message to our leaders in Congress: Robust retirement savings are key to keeping the
American promise. They uel the capital markets that drive innovation and growth. They enable retirees to live in dignity
and not burden their children. Every penny o retirement savings spares government the potential need to help elders who
would much rather help themselves. And when young and middle-aged workers know they can count on strong, solvent
public and private retirement systems, they, too, can be reed up to take risks, to change jobs, to learn new skills and maybe
even start their own business, and to reach or their own American dreams.
Isnt that the American promise we all believe in? Lets send that message to our Congress loud and clear.
271681 11/11
1The Putnam Lietime Income Survey, with research methodology provided by the Putnam Institute, was conducted online
by Brightwork Partners and completed in the rst quarter o 2011. The survey o 3,290 working adults age 18 to 65 was
weighted to U.S. Census parameters or all working adults.
The views and opinions expressed are those o Robert L. Reynolds, President and CEO o Putnam Investments, are subject
to change with market conditions, and are not meant as investment advice.
Based on remarks to the American Society o Pension Proessionals and Actuaries, Maryland, October 24, 2011.
I, or example, we could see real action to make Social
Security solvent, we would also see a huge surge in
conidence at home and around the world, proo positive
that Americans can control their own destiny.