The CEO of the largest investment-management firm in the world has some thoughts on fixing what’s broken about the retirement system in America, which he shared in his annual letter to investors.
In his letter, BlackRock (NYSE:BLK) CEO Larry Fink outlined the challenges that Americans face in securing a long, comfortable retirement, just like his parents had. Times have changed as people are living longer, pensions are largely a thing of the past, the future of Social Security is a political football, and the workforce is rapidly changing with the rise of the gig economy and independent contractors.
“[Retirement] is a much harder proposition than it was 30 years ago, and it’ll be a much harder proposition 30 years from now,” he wrote, adding that as a society, more effort needs to be spent on helping people afford those extra years.
The BlackRock CEO doesn’t have all the answers, but he does have some ideas on where to start.
A national problem
If you don’t think retirement is approaching crisis level, consider these numbers. Nearly half of Americans between the ages of 55 and 65 reported having nothing saved for retirement in personal accounts, including a pension, individual retirement account (IRA), or 401(k) in 2022, according to the U.S. Census Bureau.
Further, Social Security is on pace to run out of reserves by 2034, which means the average retiree could get less than they deserve. The reserves have been drawn down over the years to the point that in 2034, without additional action from lawmakers to replenish them, beneficiaries will get about 20% less than they should get.
“It’s no wonder younger generations, Millennials and Gen Z, are so economically anxious,” Fink wrote. “They believe my generation — the Baby Boomers — have focused on their own financial well-being to the detriment of who comes next. And in the case of retirement, they’re right. And before my generation fully disappears from positions of corporate and political leadership, we have an obligation to change that.”
Fink believes that fixing retirement requires a national solution — one that involves governments and companies.
“Maybe once a decade, the U.S. faces a problem so big and urgent that government and corporate leaders stop business as usual,” he wrote. “They step out of their silos and sit around the same table to find a solution … More recently, tech CEOs and the federal government came together to address the fragility of America’s semiconductor supply chain. We need to do something similar for the retirement crisis. America needs an organized, high-level effort to ensure that future generations can live out their final years with dignity.”
Automatic for the people
Coming up with answers starts with looking at what other countries have done. In the Netherlands, the retirement age automatically adjusts as the country’s life expectancy increases to keep the state pension affordable. While that may be a tough sell in the United States, people who want to work through their 60s and into their 70s or longer should be encouraged to do so.
“What if the government and the private sector treated 60-plus-year-olds as late-career workers with much to offer rather than people who should retire?” Fink wrote.
The other big issue is affordability. Some 40% of Americans don’t have $400 to spare for an emergency expense like a car payment or hospital visit, so how are they expected to even think about saving for retirement?
That’s a complicated question that delves into much larger issues related to addressing poverty in America, but steps can be taken to make it easier for people to save and invest.
“As a nation, we should do everything we can to make retirement investing more automatic for workers,” Fink wrote.
About 17% of people who do have access to a company plan are not enrolled, so companies should consider enacting auto enrollment in retirement plans. This will be mandatory in 2025 for new 401(k) plans due to a new law that passed in Congress in 2022, and BlackRock already does it. However, Fink recommends that more companies with existing 401(k) plans do the same because often, workers are either not aware of the plan, are confused by it, or just don’t have the time to think about it.
He added that investing needs to be simplified, and target-date funds are one way to do that, as the portfolios shift over time based on the person’s retirement date. BlackRock is also rolling out a new product called LifePath Paycheck, which will go live in 14 retirement plans to some 500,000 people in April. LifePath Paycheck gives plan participants the opportunity to convert a portion of their 401(k) assets into a lifetime income stream once they hit retirement age.
A plan for gig-economy workers
The other sea change impacting the retirement landscape is the rise of workers in the gig economy, including freelancers and independent contractors who don’t have access to company 401(k) plans.
“There are 57 million people like this in America — farmers, gig workers, restaurant employees, independent contractors — who don’t have access to a defined contribution plan. And while better investment products can help, there are limits to what something like a target-date fund can do,” Fink said.
However, Fink said that other countries, namely, Australia, have addressed this issue by requiring all employers to contribute a portion of the workers’ income into a retirement account — whether they are a part-timer, contract worker or freelancer. This goes for every worker between the ages of 18 and 70, and the account is the employees’ to take with them wherever they go.
This program, called the Superannuation Guarantee, was introduced in 1992. Today, Australia has the fourth-largest retirement system in the world for the 54th largest population, and it will “likely have more retirement savings per capita than any other country,” according to Fink.
He believes Australia’s plan could be a good model for the U.S., as 20 states have already instituted some form of it.
These are just some of the key ideas from Fink’s letter, which you can read in full at BlackRock.com. As Fink wrote, he is “not pretending to have the answers,” but he is keen to contribute to a national conversation. To that end, he said BlackRock will be announcing a series of partnerships and initiatives over the next few months to get the conversation going.
