America Has a Retirement Crisis

When you look at the data regarding American workers retirement savings, two glaring truths emerge.

One is that millions of Americans are not saving enough to sustain their standard of living in retirement. The second is that the problem is worse, which will impact both American households and the national economy.

Indeed, millions of Americans may find themselves navigating their later years with partial dependency on external aid, resulting in a standard of living well below their expectations.

Even the most optimistic estimates indicate that slightly over 50 percent of households may face inadequate savings.

"As a society, we focus a tremendous amount of energy on helping people live longer lives. But not even a fraction of that effort is spent helping people afford those extra years,” Larry Fink, the 71-year-old CEO of BlackRock, wrote in a letter to shareholders last week.

Fink points out that 40 percent of Americans lack even $400 for emergencies, much less retirement savings.

“America needs an organized, high-level effort to ensure that future generations can live out their final years with dignity,” Fink wrote.

Globally, funding retirement is becoming increasingly challenging due to rising life expectancies. The U.S. faces a particularly severe issue, with over 4.1 million citizens retiring each year, which equates to about 11,200 daily until 2027. The U.S. retirement system, valued at $38 trillion, is among the largest worldwide.

Fink, who is?worth an estimated $1.2 billion, notes that many 65-year-olds in the early 1950s didn't get a chance to retire because many had already passed away. In other words, he writes, more than half of workers who had paid into Social Security never got a penny because they died before they could claim the benefit.

"Today, these demographics have completely unraveled, and this unraveling is obviously a wonderful thing," Fink added. "We should want more people to live more years. But we can't overlook the massive impact on the country's retirement system."

American companies pioneered the shift from defined benefit pensions to defined contribution plans four decades ago, transferring the onus of retirement savings from the employer to the employee. Today’s retirees, who are living longer, are likely to find their 401k savings insufficient.

“We are at a critical crossroads. Millions of Americans are at risk of running out of savings in retirement,” Catherine Collinson, president of the Transamerica Center for Retirement Studies told The Financial Times. “It’s a societal test — how will we help those who are aging in their time of need, when they no longer have resources available to them?”

The Main Causes

The retirement crisis in the United States stem from a combination of factors that have led to financial insecurity among retirees.

1. Insufficient Savings: Many people face financial insecurity in their later years due to not saving enough during their working years.

2. Shift from Traditional Pensions to 401(k) Plans: The transition from traditional pension plans to 401(k) plans has proven to be inadequate for many Americans, especially when faced with job loss, divorce, or unexpected expenses.

4. Lack of Access to Retirement Savings Plans: Millions of workers in the private sector do not have access to retirement savings plans through their employers.

5. Health Disparities in Retirement: Lower-income individuals tend to face more health challenges and require more assistance with daily living during their retirement years.

Concerns regarding the US retirement system have persisted for years, fueled by the decline in the working-age population and the increasing longevity of retirees, with many now living into their 80s. Trustees overseeing Social Security, the government retirement program, projected last year that benefit reductions would commence in 2033 unless Congress intervened by raising the retirement age or implementing additional taxes.

Fink says society needs to encourage people to stay in work longer. “It’s a bit crazy that our anchor idea for the right retirement age — 65 years old — originates from the time of the Ottoman Empire,” he wrote.

Ageism at Work

However, during a LinkedIn Live event on March 6 with Pensions & Investments’ Rob Kozlowski, labor economist Teresa Ghilarducci said retirement is often not a choice for many older Americans.

"Most people who are retired said they were pushed out, so you can't even choose to work longer," said Ghilarducci, author of the book "Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy."

An AARP survey in 2022 survey supports her contention, finding that most workers over 50 say they face ageism at work. And because of ill health or an unexpected job loss, many older Americans stop working before they planned to. The median age of retirement in the U.S. is 62 — even lower than the "traditional" retirement age of 65.?

The Failure of 401(k) Plans

Ghilarducci calls the current 401(k) system a “fake solution” creating a “hope” that by extending their careers, employees can ensure their financial stability without overhauling the pension system or increasing Social Security contributions.

However, Ghilarducci points out that this isn’t feasible for everyone, especially those in physically demanding roles. “We have a system where we’re kind of sentencing a big portion of older employees to be in pain for most of their days,” she remarks, highlighting the system’s shortcomings for such workers.

Statistics from the Bureau of Labor Statistics and the University of Michigan’s Health and Retirement Study have consistently demonstrated that the absence of a defined benefit plan, replaced by individual retirement accounts or 401(k) plans, “made life completely different for workers,” said Ghilarducci.

Those lacking an IRA or 401(k) face a high risk of poverty in retirement, while those with a defined benefit plan are much more secure, she said.

“This experiment we’ve had since the '80s — what is that, 40 years? — has just really failed.”

Fink's Solutions

America’s retirement savings shortfall and the impending shortfall in Social Security funding are not recent issues. Fink’s remarks carry particular weight due to his role as CEO of BlackRock, the largest asset management firm globally, overseeing over $10 trillion, including retirement funds.

With over half of BlackRock’s assets dedicated to retirement, Fink proposes several solutions:

• Implementing retirement plans for all workers, including those in gig and part-time roles, as done by 20 states.
• Motivating employers to provide incentives like matching contributions and facilitating 401(k) transfers.
• Establishing 401(k)-style plans that offer stable, pension-like income, countering the trend Fink describes as a move “from financial certainty to financial uncertainty.”

It should be noted that Fink’s interest in increasing retirement savings is partly because BlackRock benefits from the fees on these accounts.

“He’s steering the conversation toward BlackRock — and a lot of people who talk about Social Security reform on Wall Street want to privatize it in some manner and make money,” said Laurence Kotlikoff, a Boston University economist and Social Security specialist, in a statement to CBS MoneyWatch.

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