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Putnam Perspectives: Savings, Solvency and the American Promise

Putnam Perspectives: Savings, Solvency and the American Promise

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Published by Putnam Investments
Robust retirement savings are key to keeping the American promise. They fuel the capital markets that drive innovation and growth. They enable retirees to live in dignity and not burden their children. Every penny of 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 freed up to take risks, to change jobs, to learn new skills and maybe even start their own business, and to reach for their own American dreams.
Robust retirement savings are key to keeping the American promise. They fuel the capital markets that drive innovation and growth. They enable retirees to live in dignity and not burden their children. Every penny of 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 freed up to take risks, to change jobs, to learn new skills and maybe even start their own business, and to reach for their own American dreams.

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Categories:Business/Law
Published by: Putnam Investments on Nov 30, 2011
Copyright:Attribution Non-commercial

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12/03/2012

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PUTNAM INVESTMENTS |
putnam.com
I think we all know in our bones that America is at a critical inection point. We reallydo ace a choice between decline and renewal. I we want to keep the Americanpromise o a better lie or our children, we absolutely must make a transition awayrom public debt, leverage, and excessive debt-ueled consumption to a neweconomic model based on higher personal savings, public solvency, more invest-ment, more exports, more new business ormation, and more rapid job creation. Thatwon’t be easy, but the alternative is worse. The status quo course we’re on right nowis dangerous and unsustainable.
The road to insolvency
Since the turn o this new century, America’s scal health has taken a drastic turn orthe worse. Back in the good old days o 2000, the Congressional Budget Oce [CBO]projected that by 2011 ten years o record ederal surpluses would turn the ederaldebt into a net surplus o $2.3 trillion dollars — that’s the alling debt line we see inFigure 1 as the national debt is paid down past zero! You may remember that somepeople actually worried about what might happen i the ederal government didn’tneed to issue any new debt. Well, we’re not losing sleep over that anymore, are we?
•
America’s debts haveput us on the road toinsolvency
•
Our workplaceretirement systemprovides a great base forincreasing our savings
•
Now the target of budgetscrutiny, retirementsavings incentives canactually help keep theAmerican promise
November 2011»Putnam perspectives
Savings, Solvency, and theAmerican Promise
Robert L. Reynolds
President and Chie Executive Ofcer
I we want to keep the American promise o a better lie orour children, we absolutely must make a transition away rompublic debt, leverage, and excessive debt-ueled consumptionto a new economic model based on higher personal savings,public solvency, more investment, more exports, more newbusiness ormation, and more rapid job creation.
 
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NOVEMBER 2011 |
Savings, Solvency, and the American Promise
Figure 1. A “lost decade” o decits uels a surge in America’s national debt
-2
 
($) 108640PUBLICLY HELD FEDERAL DEBT ($T)
Actual debt 2000–2011$10.2 trillionCBO projected debt-$2.3 trillion
(CBO, January 2001)
debtsurplus
2200020052011
 
$12.5T
Source: Pew analysis o Congressional Budget Oce (2001–2011) data.
What happened? History took us by surprise. Insteado big surpluses, we had a decade o decits, liting thenational debt held by the public to over $10 trillion by2011, $12.5 billion more than the CBO had projected atthe 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 Aghanistan and Iraq, and other new deense costs
       •
Major new spending on discretionary programs
       •
 A new drug entitlement program or seniors
       •
Massive stimulus spending to try to end of another depression ater the crash o 2008
But the single most damaging cause o these decits,shown here in red and accounting or more than aquarter o total decits — twice as much as the Bushtax cuts — was the lower revenue ows caused byslower economic growth, which was well below what theCBO had projected. In other words, economic growth, orthe lack o it, is the most powerul variable in America’sscal health.
Unsustainable decits
Today, ederal decits 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 — andthis includes internal government debt like the SocialSecurity trust unds — is on track to reach $15 trillionby the end o this year. Fiteen trillion dollars is a mind-boggling number and dicult to imagine.
The single most damaging cause o these deicits … was the lower revenue lows caused byslower economic growth … In other words, economic growth, or the lack o it, is the mostpowerul variable in America’s iscal health.
 
PUTNAM INVESTMENTS |
putnam.com
3
Figure 2. America’s decits now rank among the world’s largest
2010 budget defcit as a percentage o GDP
 
U.S.U.K.FranceCanadaAustraliaGermany10.6%10.4%7.0%5.5%4.6%3.3%
Note: IMF calculations or the U.S. dier rom Congressional Budget Oce gures, which put the U.S. decit at 8.9% GDP.Source: International Monetary Fund. All inormation 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 andwww.USdebtclock.org. 
And the orward outlook is worse. The Congressional Budget Oce advises us that President Obama’s most recentbudget would raise total national debt held by the public rom roughly 63% o GDP today to more than 90% by 2020, withno end in sight! That is a debt-to-economy ratio that America hasn’t seen since World War II.

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