Putnam Investments chief Robert Reynolds went to Washington last Wednesday to urge Congress to save Social Security — just not in the way financial services industry executives usually recommend.
Strengthening the entitlement program and the private retirement system are at the heart of the proposal he outlined at The National Press Club.
“If we don't act, we are likely to see many millions more elderly Americans short of funds for food, clothing, shelter and medicine by the decade of the 2020s,” Mr. Reynolds said.
For reforming Social Security, he backed many of the steps highlighted in the draft proposal last week from the presidential deficit commission — gradually raising the retirement age, means-testing benefits and broadening the payroll tax base.
He left out, however, any suggestion of individual Social Security accounts, an idea popular among Republicans and anathema to liberals. “I don't think you need private accounts in Social Security to make it solvent,” Mr. Reynolds said.
It was not the typical message that lawmakers hear from money managers, who argue that investing the public retirement funds in the market would increase returns and undergird the system.
“The most important point Bob was making was underlining the absolute necessity of Social Security solvency,” said Dallas Salisbury, chief executive of the Employee Benefit Research Institute, who attended Mr. Reynolds' speech. “This shows exceptional leadership by a financial services industry leader.”
Mr. Reynolds went beyond Social Security as he unveiled his “new solvency” initiative, which outlines changes in tax and spending policies designed to reduce the federal deficit and foster economic growth. He warned that the United States is carrying unsustainable levels of debt that could suddenly throw the economy into a tailspin if foreign creditors lose confidence in the ability of U.S. political leaders to address the problem.
Reforming Social Security is the first step in getting the U.S. fiscal house in order, according to Mr. Reynolds. Rather than criticize it as misguided, he lifted it up as a key component of retirement security.
“Social Security is a cornerstone element of most Americans' retirement,” Mr. Reynolds said. “It is absolutely vital to lower-income citizens, who draw the vast majority of their retirement income from it.”
The program serves as the primary source of guaranteed lifetime income for people of modest financial backgrounds, according to E. Thomas Johnson Jr., senior vice president for retirement security at New York Life Insurance Co., who attended Mr. Reynolds' speech.
“There isn't enough capacity at the moment or in the near future to deliver that [foundation] commercially,” Mr. Johnson said.
Although Social Security is paying out benefits now, its reserves are projected to be exhausted by 2037, necessitating a 22% across-the-board benefit cut. Over the next 75 years, the system faces a $5.3 trillion shortfall.
Fixing Social Security represents the low-hanging fruit of balancing the budget, according to Mr. Reynolds.
“Social Security solvency does not require Draconian measures, just common sense and some very uncommon political courage,” Mr. Reynolds said. “It requires arithmetic, not rocket science.”
Mr. Reynolds also called for reforms to the private retirement system, which he said complements Social Security.
He touted legislation recently introduced on Capitol Hill that would establish automatic IRAs for workers at companies without their own retirement plans. He said the concept would extend coverage to “younger, low-income and minority workers.”
Existing workplace retirement plans also should quickly adopt the best-practice plan designed outlined in the 2006 Pension Protection Act, according to Mr. Reynolds. These elements include automatic enrollment of employees in 401(k) plans, automatic savings escalation and guidance to qualified default investment alternatives.
Since the pension law was implemented two years ago, employee contributions to their retirement plans have increased, Mr. Reynolds said. The design changes have been adopted voluntarily by companies.
“The results are in, and it's a winner,” Mr. Reynolds said. “Payroll deduction is the greatest way for people to save. Let's make it mandatory.”
Mr. Reynolds visited Washington just as the lame-duck session of Congress opened this week. The presidential deficit commission unveils its final report Dec. 1.
He stressed that his new solvency idea is not “root canal” budget cutting but rather a plan to spur savings, investment and job creation.
“The new solvency means moving our country onto a path that has our national economy, personal incomes and government revenues all growing faster than any debts we owe, and on a sustainable basis,” Mr. Reynolds said. “This is not austerity; this is sanity.”
E-mail Mark Schoeff Jr. at [email protected].
