Are mandatory saving accounts coming to the US? It looks possible after BlackRock chairman and CEO, Laurence Fink, said they should be part of a comprehensive solution to the retirement funding crisis.
BlackRock has $3.9trn (€3trn) of assets under management, of which 60% is for institutional clients, including pensions. Fink sits on the finance committee at the New York University and last month he talked to students at its Stern School of Business and urged government and business leaders to recognise that Americans are unprepared for increasing longevity, and to look for a solution as a national priority.
The paradox is that to be prepared for a long life with the right amount and kind of savings, investors should take a long-term horizon. But “we live in a world of 9,000 tweets a second”, and “the entire system is now wired toward the short term”, noticed Flink, whose speech’s title was indeed ‘Longevity in the Age of Twitter’.
Fink recalled that in the president’s budget plan, social security and Medicare outlays are projected to rise more than 70% by 2023, which is “unsustainable”; while state and local government pensions are underfunded by nearly a trillion dollars, the top 100 corporate pension plans are nearly half a trillion dollars underfunded, and only two-thirds of workers have saved anything for retirement, with most workers having saved less than $25,000.
BlackRock’s CEO was critical of the asset management industry, including his own company. “As an industry, we need to measure our performance not against benchmarks but against investors’ objectives or liabilities,” he said. “That means much less of a focus on short-term sales and products – and more on investors’ long-term needs.”
But, in the end, the whole pension system needs a radical overhaul that – according to Fink – should include “some form of mandatory retirement savings, similar to Australia’s successful superannuation system, or the new pension requirements in the UK.”
Australians today have more than A$1.6trn (€1.2trn) in assets held in superannuation accounts, which belong to employees. This represents one of the highest per capita retirement savings pools in the world, thanks to a system launched 20 years ago. For every part-time and full-time employee aged 18 to 70, employers must contribute a portion of income into a superannuation account. At the start, the contribution was 3% of income but this has risen to 9% today, and will rise to 12% by 2020. Individuals can also make additional contributions.
Asked whether BlackRock is planning to lobby Congress in favour of such a measure or to organise a coalition of pension industry professionals in order to promote this idea, Fink said this was not the case at the moment. Nor did he have a specific proposal in mind – he did not say if the Austrialian-like accounts should replace the current 401(k) or be in addition to them.
However, it is easy to foresee BlackRock using some of its lobbying power – over $2m in 2012, according to Opensecrets.org – to push policy makers in the direction indicated by its CEO. There are already Congressmen who are receptive to this idea. Senator Tom Harkin, an Iowa Democrat and chairman of the Senate health, education, labor and pensions committee, plans to introduce legislation this year to require businesses that don’t offer a pension or 401(k) plan to automatically enrol workers in new “Universal, Secure and Adaptable (USA) Retirement Funds”, described as able to “combine the advantages of traditional pensions – lifetime income benefits and pooled, professional management – with the portability and ease for employers of a 401(k)”.
In the meantime, in order to raise the workers’ awareness that they risk outliving their savings, the US Department of Labor (DOL) is proposing a new rule that would require 401(k) plan sponsors to include in workers’ quarterly or annual statements an estimate of what their current, or projected, savings looks like as a monthly stream of payments. The purpose is to give account holders information that will allow them to make more informed retirement planning decisions. DOL is seeking public comments on the proposed rule by 8 July 2013.