The demographics don’t lie
There’s a popular saying in economics: “You just can’t fight demographics.” And yet, when it comes to retirement, the U.S. is trying anyway.
In wealthy countries, most retirement systems have three pillars. One is what people invest personally (my dad putting his money in the stock market). Another is the plans provided by employers (my mom’s CalPERS pension). A third component is what we hear politicians mostly talking about – the government safety net. In the U.S., this is Social Security.
You’re probably familiar with the economics behind Social Security. During your working years, the government takes a portion of your income, then after you retire, it sends you a check every month. The idea actually originates from pre-World War I Germany, and these “old-age insurance” programs gradually became popular over the 20th Century largely because the demographics made sense.
Think about someone who was 65 years old in 1952, the year I was born. If he hadn’t retired already, that person was probably getting ready to stop working.
But now think about that person’s former colleagues, all the people around his age who he’d entered the workforce with back in the 1910s. The data shows that in 1952, most of those people were not preparing for retirement because they’d already passed away.
This is how the Social Security program functioned: More than half the people who worked and paid into the system never lived to retire and be paid from the system.19
Today, these demographics have completely unraveled, and this unraveling is obviously a wonderful thing. We should want more people to live more years. But we can’t overlook the massive impact on the country’s retirement system.
It’s not just that more people are retiring in America; it’s also that their retirements are increasing in length. Today, if you’re married and both you and your spouse are over the age of 65, there’s a 50/50 chance at least one of you will be receiving a Social Security check until you’re 90.20
All this is putting the U.S. retirement system under immense strain. The Social Security Administration itself says that by 2034, it won’t be able to pay people their full benefits.21
What’s the solution here? No one should have to work longer than they want to. But I do think 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.
Humanity has changed over the past 120 years. So must our conception of retirement.
One nation that’s rethought retirement is the Netherlands. In order to keep their state pension affordable, the Dutch decided more than 10 years ago to gradually raise the retirement age. It will now automatically adjust as the country’s life expectancy changes.22
Obviously, implementing this policy elsewhere would be a massive political undertaking. But my point is that we should start having the conversation. When people are regularly living past 90, what should the average retirement age be?
Or rather than pushing back when people receive retirement benefits, perhaps there’s a more politically palatable idea: How do we encourage more people who wish to work longer with carrots rather than sticks? 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?
One way Japan has managed its aging economy is by doing exactly this. They’ve found new ways to boost the labor force participation rate, a metric that has been declining in the U.S. since the early 2000s.23 It’s worth asking: How can America stop (or at least, slow) that trend?
Again, I’m not pretending to have the answers. Despite BlackRock’s success helping millions retire, these questions are going to have to be posed to a broader range of investors, retirees, policymakers, and others. Over the next few months, BlackRock will be announcing a series of partnerships and initiatives to do just that, and I invite you to join us.
For workers, make investing (almost) automatic
When the U.S. Census Bureau released its regular survey of consumer finances in 2022, nearly half of Americans aged 55 to 65 reported not having a single dollar saved in personal retirement accounts.24 Nothing in a pension. Zero in an IRA or 401(k).
Why? Well, the first barrier to retirement investing is affordability.
Four-in-10 Americans don’t have $400 to spare to cover an emergency like a car repair or hospital visit.25 Who is going to invest money for a retirement 30 years away if they don’t have cash for today? No one. That’s why BlackRock’s foundation has worked with a group of nonprofits to set up an Emergency Savings Initiative. The program has helped mostly low-income Americans put away a total of $2 billion in new liquid savings.26
Studies show that when people have emergency savings, they’re 70% more likely to invest for retirement.27 But this is where workers run into another barrier: Investing is complex even if you can afford it.
No one is born a natural investor. It’s important to say that because sometimes in the financial services industry we imply the opposite. We make it seem like saving for retirement can be a simple task, something anyone can do with a bit of practice, like driving your car to work. Just grab your keys and hop in the driver’s seat. But financing retirement isn’t so intuitive. The better analogy is if someone dropped a bunch of engine and auto parts in your driveway and said, “Figure it out.”
At BlackRock, we’ve tried to make the investing process more intuitive by inventing simpler products like target date funds. They only require people to make one decision: What year do they expect to retire? Once people choose their “target date,” the fund automatically adjusts their portfolio, shifting from higher-return equities to less risky bonds as retirement approaches.28
In 2023, BlackRock expanded the types of target date ETFs we offer so people can more easily buy them even if they don’t work for employers offering a retirement plan. 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.29 And while better investment products can help, there are limits to what something like a target date fund can do. Indeed, for most people, the data shows that the hardest part of retirement investing is just getting started.
Other nations make things simpler for their part-time and contract workers. In Australia, employers must contribute a portion of income for every worker between the ages of 18 and 70 into a retirement account, which then belongs to the employee. The Superannuation Guarantee was introduced in 1992 when the country seemed like it was on the path to a retirement crisis. Thirty-two years later, Australians likely have more retirement savings per capita than any other country. The nation has the world’s 54th largest population,30 but the 4th largest retirement system.31
Of course, every country is different, so every retirement system should be different. But Australia’s experience with Supers could be a good model for American policymakers to study and build on. Some already are. There are about 20 U.S. states — like Colorado and Virginia — that have instituted retirement systems to cover all workers like Australia does, even if they’re gig or part-time.32
It’s a good thing that legislators are proposing different bills and states are becoming “laboratories of retirement.” More should consider it. The benefits could be enormous for individual retirees. These new programs could also help the U.S. ensure the long-term solvency of Social Security. That’s what Australia found — their Superannuation Guarantee relieved the financial tension in their country’s public pension program.33
But what about workers who do have access to an employer retirement plan? They need support too.
Even among employees who have access to employer plans, 17% don’t enroll in them, and the hypothesis among retirement experts is this is not a conscious choice. People are just busy.
It sounds trivial, but even the hour or so it takes someone to look through their work email inbox for the correct link to their company’s retirement system, and then select the percentage of their income they want to contribute can be the unclearable hurdle. That’s why companies should make a conscious effort to look at what their default option is. Are people automatically enrolled in a plan or not? And how much are they auto-enrolled to contribute? Is it a minimum percentage of their income? Or the maximum?
In 2017, the University of Chicago economist Richard Thaler won the Nobel Prize, in part, for his pioneering work around “nudges” — small changes in policy that can have enormous impact in people’s financial lives. Auto-enrollment is one of them. Studies show that the simple step of making enrollment automatic increases retirement plan participation by nearly 50%.34
As a nation, we should do everything we can to make retirement investing more automatic for workers. And there are already bright spots. Next year, a new federal law will kick in, requiring employers that set up new 401(k) plans to auto-enroll their new workers. Plus, there are hundreds of major companies (including BlackRock) that have already taken this step voluntarily.
But firms can do even more to improve their employee’s financial lives, such as providing some level of matching funds for retirement plans and offering more financial education on the tremendous long-term difference between contributing a small percentage of your income to retirement versus the maximum. I also think we should make it easier for workers to transfer their 401(k) savings when they switch jobs. There is a menu of options here, and we need to explore all of them.
For retirees, help them spend what they saved
In 2018, BlackRock commissioned a study of 1,150 American retirees. When we dug into the data, we found something unexpected — even paradoxical.
The survey showed that after nearly two decades of retirement, the average person still had 80% of their pre-retirement money saved. We’re talking about people who were probably between the ages of 75 and 95. If they had invested for retirement, they were likely sitting on more than enough money for the rest of their lives. And yet the data also showed that they were anxious about their finances. Only 32% reported feeling comfortable about spending what they saved.35
This retirement paradox has a simple explanation: Even people who know how to save for retirement still don’t know how to spend for it.
In the U.S., this problem’s roots stretch back more than four decades when employers began switching from defined benefit plans — pensions — to defined contribution plans like 401(k)s.
In a lot of ways, pensions were much simpler than the 401(k). You had a job somewhere for 20 or 30 years. Then when you retired, your pension paid you a set amount — a defined benefit — every month.
When I entered the workforce in the 1970s, 38% of Americans had one of these defined benefit plans, but by 2008 the percentage had been cut almost in half.36 Meanwhile, the fraction of Americans with defined contribution plans almost quadrupled.37
This should have been a good thing. Beginning with the Baby Boomers, fewer and fewer workers spent their entire careers in one place, meaning they needed a retirement option that would follow them from job to job. In theory, 401(k)s did that. But in practice? Not really.
Anyone who’s switched jobs knows how unintuitive it is to transfer your retirement savings. In fact, studies show that about 40% of employees cash out their 401(k)s when they switch jobs, putting themselves back at the starting line for retirement savings.38
The real drawback of defined contribution was that it removed most of the retirement responsibility from employers and put it squarely on the shoulders of the employees themselves. With pensions, companies had a very clear obligation to their workers. Their retirement money was a financial liability on the corporate balance sheet. Companies knew they’d have to write a check every month to each one of their retirees. But defined contribution plans ended that, forcing retirees to trade a steady stream of income for an impossible math problem.
Because most defined contribution accounts don’t come with instructions for how much you can take out every month, individual savers first must build up a nest-egg, then spend down at a rate that will last them the rest of their lives. But who really knows how long that will be?
Put simply, the shift from defined benefit to defined contribution has been, for most people, a shift from financial certainty to financial uncertainty.
That’s why around the same time we saw the data that retirees were nervous about spending their savings, we started wondering: Was there something we can do about it? Could we develop an investment strategy that provided the flexibility of a 401(k) investment but also the potential for a predictable, paycheck-like income stream, similar to a pension?
It turns out, we could. That strategy is called LifePath Paycheck™, which will go live in April. As I write this, 14 retirement plan sponsors are planning to make LifePath Paycheck™ available to 500,000 employees. I believe it will one day be the most used investment strategy in defined contribution plans.
We’re talking about a revolution in retirement. And while it may happen in the U.S. first, eventually other countries will benefit from the innovation as well. At least, that is my hope. Because while retirement is mainly a saving challenge, the data is clear: It’s a spending one too.
Fear vs. hope
Before I conclude this section on retirement, I want to share a few words about one of the largest barriers to investing for the future. In my view, it’s not just affordability or complexity or the fact that people are too busy to enroll in their employer’s plan.
Arguably the biggest barrier to investing for retirement — or for anything — is fear.
In finance, we sometimes think of “fear” as a fuzzy, emotional concept — not as a hard economic data point. But that’s what it is. Fear is as important and actionable a metric as GDP. After all, investment (or lack thereof) is just a measure of fear because no one lets their money sit in a stock or a bond for 30 or 40 years if they’re afraid the future is going to be worse than the present. That’s when they put their money in a bank. Or underneath the mattress.
This is what happens in many countries. In China, where new surveys show consumer confidence has dropped to its lowest level in decades, household savings have reached their highest level on record — nearly $20 trillion — according to the central bank.39 China has a savings rate of about 30%. Nearly a third of all money earned is socked away in cash in case it’s needed for harder times ahead. The U.S., by comparison, has a savings rate in the single digits.40
America has rarely been a fearful country. Hope has been the nation’s greatest economic asset. People put their money in American markets for the same reason they invest in their homes and businesses — because they believe this country will be better tomorrow than it is today.
This big, hopeful America has been the one I’ve known my whole life, but over the past few years, especially as I’ve had more grandchildren, I’ve started to ask myself: Will they know this version of America, too?
As I was finishing this letter, The Wall Street Journal published an article that caught my attention. It was titled “The Rough Years that Turned Gen Z into America’s Most Disillusioned Voters,” and it included some eye-catching — and really disheartening — data.
The article showed that from the mid-1990s through most of the early 21st Century, most young people — around 60% of high school seniors, to be specific — believed they’d earn a professional degree, would land a good job, and go on to be wealthier than their parents. They were optimistic. But since the pandemic, that optimism has fallen precipitously.
Compared with 20 years ago, the current cohort of young Americans is 50% more likely to question whether life has a purpose. Four-in-10 say it’s “hard to have hope for the world.”41
I’ve been working in finance for almost 50 years. I’ve seen a lot of numbers. But no single data point has ever concerned me more than this one.
The lack of hope worries me as a CEO. It worries me as a grandfather. But most of all, it worries me as an American.
If future generations don’t feel hopeful about this country and their future in it, then the U.S. doesn’t only lose the force that makes people want to invest. America will lose what makes it America. Without hope, we risk becoming just another place where people look at the incentive structure before them and decide that the safe choice is the only choice. We risk becoming a country where people keep their money under the mattress and their dreams bottled up in their bedroom.
How do we get our hope back?
Whether we’re trying to solve retirement or any other problem, that is the first question we have to ask, although I readily admit that I do not have the solution. I look at the state of America — and the world — and I am as answerless as everyone else. There’s so much anger and division, and I often struggle to wrap my head around it.
What I do know is that any answer has to start by bringing young people into the fold. The same surveys that show their lack of hope also show their lack of confidence — far less than any previous generation — in every pillar of society: In politics, government, the media, and in corporations. Leaders of these institutions (I am one) should be empathetic to their concerns.
Young people have lost trust in older generations. The burden is on us to get it back. And maybe investing for their long-term goals, including retirement, isn’t such a bad place to begin.
Perhaps the best way to start building hope is by telling young people, “You may not feel very hopeful about your future. But we do. And we’re going to help you invest in it.”