The retirement savings crisis in America has brought us to this point: It’s a near certainty that mandatory savings accounts are in the future of anyone with a full- or part-time job.
The world’s largest investment firm BlackRock, with $4 trillion under management and a lot of weight to throw around, is the latest to sound the call. “We need a comprehensive solution to retirement savings that includes some form of mandatory retirement savings,” CEO Laurence Fink said this week. He added that his firm has been agitating “quite noisily” for retirement overhaul and that going forward “we’ll be louder as a firm.”
Fink’s call for mandatory savings accounts is in sync with other prominent thinkers in the retirement savings field. Alicia Munnell, director of the Center for Retirement Research at Boston College, is on record favoring these accounts. She says they should be designed to provide 20% of pre-retirement income. Munnell’s colleague at the Center, Julie Agnew, in a study credits mandatory savings accounts in Australia for that country’s “high individual saving rates and broad coverage at reasonably low cost to the government.”
U.S. Senator Tom Harkin, an Iowa Democrat and chairman of the Senate Health, Education, Labor and Pensions Committee, is looking at legislation this year that would make saving for retirement more widely available through a so-called USA Retirement fund, though it would not necessarily be mandatory. Billionaire Peter Peterson floated the idea of mandatory accounts several years ago.
The Australian system increasingly is being held up as a model for the U.S. In Australia, employers must contribute 9% of pay (rising to 12% in 2020) to every full- or-part-time worker between the ages of 18 and 70. This makes the accounts a little like a traditional pension in that the employer is funding them. But the accounts are owned and managed by individuals, as with a 401(k).
The Australian “superannuation” accounts were put in place just 20 years ago and have all but solved that country’s retirement savings crisis. Fink believes something similar would work in U.S. too. He suggests that employer contributions to these accounts be phased in over time, as they have been in Australia.
It’s not clear if such accounts would replace the 401(k), be made part of the 401(k) or be in addition to the 401(k). It’s also not clear if employees would be required to contribute to them. Fink says individuals might be asked to contribute some part of their income, possibly 3% to 5%, but that any employee requirement would best be contemplated in the context of a total retirement system overhaul. Commenting on the Australian model, Fink said:
“Superannuation has been 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.”
According Senator Harkin:
- The difference between the amount of savings working-age Americans have accumulated for retirement and the amount they should have already saved is $6.6 trillion.
- Half of all Americans have less than $10,000 in savings.
- Just one in five working Americans will receive pension income during retirement.
- Nearly 6 million Americans over the age of 65 live in poverty, and that number is expected to grow.
In a new survey, BlackRock found that 73% of investors agree that keeping money safe is more important than seeking returns. This level of safety is understandable, given the turmoil that portfolios have endured the last dozen years. But it also speaks to the need for a mandatory savings program, as the relatively few who are saving anything on their own are doing so in ways that are unlikely to produce the nest egg they’ll need later in life.