Under current law, Social Security’s capacity to replace preretirement income is actually programmed to decline from nearly 39% to just over 29% by 2030. This is due to increases in the age of eligibility and to rising costs for Medicare benefits that will be deducted from future Social Security payments.
The simple fact is that the system’s replacement capacity is dropping. And at the same time, traditional defined benefit pension plans are dwindling to cover only a small minority of future retirees.
So much for the bad news. And with that, I think I’ve laid out the scale of the challenge we face, and it is daunting. But as I said, I am confident that we can solve it if we break this huge challenge down into its key elements.
So let me turn now to focus on a major element of the solution: workplace savings, 401(k) plans, and others. Because even amid the market carnage we suffered over the past year and more, there are great, positive changes underway in America’s workplace savings system, changes which began with the Pension Protection Act of 2006.
If we carry that work on and draw the right lessons from the tough markets we’ve been passing through, I believe we can create a 21st century workplace savings system that will improve participants’ results, lower volatility, and reliably deliver a significant share of income for life. In the course of doing that, we can provide a great example of public/private collaboration and lay a strong foundation for reform of other elements of America’s retirement system.
To understand the full potential of workplace savings in America, it helps to understand how these programs have evolved. And when we look back on the first generation of modern defined contribution savings, beginning with the rise of 401(k) plans in the early 1980s on through the passage of the PPA in 2006, we see an extraordinary success.
Excerpted from a speech given by Robert L. Reynolds President and CEO Putnam Investments, at the 401KWire.Com Influencers’ Summit 2009: DC-IO Partnership Washington, DC May 6, 2009. The full speech is embedded below.
