Two investment industry titans are on a crusade to call attention to the crisis in America’s retirement savings system.
BlackRock CEO Lawrence Fink believes we need a radically new mandatory savings program like the “superannuation” system in Australia. Fink argues that Social Security, pension plans and 401(k) plans are falling short when it comes to helping Americans accumulate savings for retirement. Under Australia’s program, employers are required to contribute 9 percent of an employee’s income into accounts that belong to workers.
Fink notes that longevity is turning Social Security into a losing proposition for workers. When it was formed in 1935, a 21-year-old male had a 50-percent chance to live to the age of 65. Social Security is funded by a 6.2-percent tax on workers, which is matched by employers. Fink calculates that if a worker lives 30 years after retiring, he gets back his contributions—without any investment return.
Even the highest earners receive only $24,000 annually from Social Security, and yet 70 percent of Americans’ retirement income comes from Social Security. Only two-thirds of Americans have saved for retirement, and most have saved less than $25,000, says Fink, citing figures from the Employee Benefit Research Institute.
Vanguard’s John Bogle, speaking at a Morningstar conference in Chicago, claimed the United States is facing three retirement train wrecks: the growth of Social Security entitlements, “grotesquely underfunded” pension funds, and the structure of defined-contribution, or 401(k), plans.
Pension funds, called defined-benefit plans, are funded and managed by employers. The private sector has largely moved away from these plans and into defined-contribution plans mostly funded and managed by the employee.
Now, more government entities running public pensions are looking to get out from under their ever-growing liabilities and are considering swapping employees' funds into 401(k)-type structures. Proposals to set up defined-contribution plans are in the works in Pennsylvania, Florida, Arizona, Kentucky, Texas, Washington and Michigan.
Both Fink and Bogle say there is just not enough money being set aside in 401(k)s, which is why Fink believes a mandatory retirement system is needed. In addition, low interest rates have worked against savers, in that a 2-percent to 3-percent return in bonds will not come close to providing the returns necessary to build retirement savings. Bogle also believes the fees charged by most 401(k) plans are too high and eat into the nest egg employees are trying to build.
Actually, the recent rise in interest rates is a good thing for pension plans that are well-managed. The higher rates serve to discount their long-term liabilities, narrowing the gap between assets and liabilities and improving funding ratios. However, pensions overexposed to the bond market—and many are—will incur losses on declining fixed-income values as rates rise.
Saving for retirement is hard. In today’s world of stagnant incomes and stretched budgets, workers and employers are finding it difficult to put away funds for the long term. That said, it doesn’t absolve governments, corporations and employees from meeting our financial obligations over our extended lives. Perhaps a mandatory savings plan is needed to accomplish that goal.•
Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or firstname.lastname@example.org.