Today’s world and tomorrow’s goals call for outcome-oriented solutions, Fink said in a talk last week at New York University’s Stern School of Business.
During Fink’s formative years, the U.S. was launching the Great Society, which sought to summon the resources of government to wipe out poverty. “Today, the generation that came of age with the Great Society is headed for retirement and giving you a Gray Society,” Fink said, “where we will need to summon up even greater resources just to meet their needs.”
Citing longevity statistics that predict one in four Americans who is 65 today will live past 90, and that nearly one-third of babies born two years ago will live to 100, Fink called the Gray Society an expensive blessing, with rising Medicare costs and underfunded government and corporate pensions.
“And individuals aren’t ready,” Fink said, pointing to statistics from the Employee Benefits Research Institute, which found only two thirds of workers have saved anything for retirement, and most workers have saved less than $25,000.The three legs of the traditional retirement stool—Social Security, pensions and personal savings—have been allowed to grow rickety, Fink said. “Retirees now depend on Social Security for 70% of their income.” But while Social Security is an essential part of the retirement system, he said, the program was established for different demographics and was never intended to be an individual’s sole retirement income.
The country needs to acknowledge the existence of a systemic crisis that is threatening no only retirement systems but also economic futures, Fink said. “And because of its far-reaching effects, a solution needs to be as big and urgent a national priority as anything we have faced in recent years. The longer we wait to act, the bigger the problem will become.”
Admitting to a Crisis
How to finance longer lives is a crisis that needs facing up to, and the country needs to take action on several fronts. “Employers need to step up in every way that can help workers achieve a secure retirement,” Fink advised. “Shifting from defined benefit plans to defined contribution plans does not absolve employers from the moral obligation to help employees prepare for retirement. More employers need to offer plans, auto-enroll all employees, provide matching funds and educate employees on the absolute necessity of maxing out their plans. The bottom line is, employers need to do more to fund their workers’ retirement.”
Fink called on the asset management industry—including his own company, BlackRock—to do a better job. The industry needs to measure its performance not against benchmarks but against investors’ objectives or liabilities, focusing far less on short-term sales and products, and much more on investors’ long-term needs. “Investors don’t care if a fund holds mid-cap stocks or Mexican government debt,” Fink pointed out. They want products that will provide long-term outcomes to help buy a house, pay college tuition or fund retirement.
Absolute certainty is never an option with any investment that carries a measure of risk, Fink said, but emphasized that financial services firms must do “a much better job of accompanying savers on their life journeys with outcome-oriented solutions that help them understand how to stay on course—with target-date funds, target risk funds and multi-asset solutions made for today’s world and tomorrow’s goals.”
The financial services industry must help investors look beyond the headlines, “recognizing that successful investing is not about timing the market, but about time in the market.” Investor education was the motivation for BlackRock’s education campaign to get investors focused on broader opportunities in the market and the need for a long-term, patient approach.
An Australian Model
Pointing to Australia’s successful superannuation system or the new pension requirements in the UK, Fink said that given the massive amounts of savings needed, as well as investor psychology and the reality of risk aversion, the country needs a substantial solution to retirement savings that includes some form of mandatory retirement savings.
In Australia, for every part-time and full-time employee age 18 to 70, employers must contribute a portion of income into a superannuation account, which then belongs to the employee. It was launched 20 years ago, when the country looked ahead to the crisis it would face in paying for retirements. At the start, the contribution was just 3% of income. It has gradually risen to 9% of income today and will rise to 12% by 2020. And individuals can make additional contributions on top of that.
Fink lauded superannuation in Australia and called it a huge success in supplementing the government pension scheme and taking the strain off it, “an attractive prospect as we think about how to relieve the burden on Social Security in this country. All told, in just 20 years, more than $1.6 trillion in assets are held in these accounts, giving Australians one of the highest per capita retirement savings pools in the world.”
Thrift for All?
He approved of some effective models in the U.S., such as the pooled fund for small employers managed by CalPERS, the state employees’ pension fund in California. “Perhaps we could do something similar nationally by opening the highly successful Thrift Savings Program for federal employees to all workers,” Fink said. “That’s the model being adopted nationally in the U.K. with the creation of the NEST plan. Or we could model a solution on successful pools already created for small employers and nonprofits.” He emphasized that the current system is broken, and an approach that includes some form of mandatory savings in addition to Social Security is needed.
Pointing to research that found individuals in the U.S. contribute 6.2% of their wages, up to $113,000, to the retirement system, and employers contribute another 6.2%, “we have a total contribution of over 12% of wages,” Fink said. If invested in the right way over 30 or 40 years, that would generate a comfortable retirement nest egg. “But many Americans are worried about the future of Social Security and that their 401(k)s and individual retirement accounts (IRAs) aren’t sufficient to meet their needs,” he said. “The current system simply isn’t working and the longer we wait to fix it, the tougher the task becomes.”
A mandatory retirement savings system would need to be phased in gradually in order not to create a shock to the economy. But Fink said it could relieve pressure on the federal budget, and the markets would welcome that outcome. “But most importantly, it would relieve the crisis of financing longevity that will be a drag on our economy and job creation for years to come if we don’t deal with it soon.”