Larry Fink Brings Needed Attention to the Retirement Crisis

Maybe Congress will finally start listening

Ric Edelman: It's Thursday, May 9th. On today's show, Larry Fink says we're facing a retirement crisis. You heard me, you heard me yesterday tell you that the new Social Security Administration report from the trustees was released this week, and it says, like they've been saying for 10 years, that the Social Security Trust Fund will be depleted in 2033, and that starting in 2033, all Social Security retirement benefits will receive only 79% of their social security checks. The average check rate now is about $1,500. That means starting in 2033, you're only going to get $1,185, a cut of more than $300 a month. That's a car payment, that's a month's worth of food, that's medicine, or an insurance payment.  

One of the statistics cited in the Social Security Administration's annual report is that they expect fertility in the US to drop to 1.9 babies per woman. We need 2.1 babies per woman to keep our population stable. With only 1.9, we've got more people dying than being born. As a percentage of the population, it means we have a reduction in young people and an increase in old people. And that means long term too few people paying into the social security system and too many getting money from it. This is a big reason why starting in 2033, our Social Security Trust Fund goes broke.  

And we're not the only country in this mess. In South Korea last year, their fertility rate was 0.7. And it's projected to fall to 0.68 this year. Remember, it takes 2.1 to have a stable population. So now in South Korea, there's a construction company that's offering workers $75,000 for every baby they produce. The chairman of the company said, quote, “If Korea's birth rate remains low, the country will face extinction.” The government there already offers housing allowances and tax breaks and paid paternity leave for fathers. None of that is working, though. South Korean women are refusing to get pregnant. 

Last year, they sold more baby carriages for pets in South Korea than for babies. Kindergartens have been converted into nursing homes. Universities have fewer students, and the South Korean military has less than 500,000 soldiers for the first time. By the end of the decade, 25% of their population will be over 65. And it'll be half of the country by 2070. With so many old people and so few younger people, the country's pension system will run out of money in 30 years. Ours runs out of money in nine years.  

Why aren't women having kids? Money. The average newlywed couple have combined debts of $124,000 in South Korea. That's why the government is offering financial incentives. And so now, so are companies. A major retailer now gives female employees two years of maternity leave. That's on top of three months guaranteed by the government. All told, the government of South Korea has spent $270 billion on everything from cash payments to subsidized babysitting services. But it's not changing many minds. Many women say the choice is between homemaker and career, and they're choosing career.  

South Korea's not alone. Japan's population has been falling 13 years in a row. The number of foreign nationals living in Japan is now at a record high. 3.2 million people. Which means that in the future, the people of Japan will increasingly not be Japanese. And it's all because of declining birth rates in Japan. The number of babies born last year there was a record low, down 5% from just one year ago. Kids under 15, they're only 11% of the population. Those over 65 are 30% of the population. And Japan's Prime Minister says that the country is, quote, “On the brink of being unable to maintain social function.” Wow. So if you were a young person hearing this message, what actions would you take? 

Would you have babies? Would you save more? In China, where they all have these same problems, their birth rate has fallen every year for the past seven years, young people are giving up on saving for retirement. I mean, why bother? That's what the typical worker is thinking. The average retirement age in China is 54. That means everyone is dependent on the Chinese Pension system, and it's running out of money, just like our Social Security system is. With so many old people, and so few young people, the only way the government can get the money it needs to support retirees is to tax younger workers, and to reduce social programs for them, so the government can focus on the older people. So younger people are just giving up. Why bother saving at all, they say. Over the next 40 years, 40% of the people in China will be 60 or older. And their public pension program will be broke in just 10 years, kind of like ours.  

We've got a retirement crisis here and around the world. Coming to the rescue? Larry Fink. You know, sometimes it takes a prominent person to say something that lots of other people have been saying for years, because until a prominent person says it, people just don't pay attention. So, let's hope that Larry is the conduit for this topic. I've been a member of a large group of people who have been championing financial education and financial literacy for decades. 

Hundreds of experts in economics, aging, finance, education, have been working on this for 40 years. The Employee Benefit Research Institute, the National Endowment for Financial Education, the American Savings Education Council, the Jumpstart Coalition for Personal Financial Literacy, the Institute for Financial Literacy, the Boys and Girls Clubs, you name it. 

I founded the Funding Our Future Coalition seven years ago with the Bipartisan Policy Center. We now have 61 academic, non-profit, educational, corporate, and government partners. You can get a link to all of these names. It's in the show notes for you. And despite all these organizations doing all this work, we still haven't solved the problem. 

Oh, for sure. There's been big progress. More people than ever are saving. When I got started in the financial field, few people had ever even heard of mutual funds. Today, mutual funds and ETFs are the most popular, important investments in the world. More than half of US households own them, but still it's only half. 

We still have a country where most Americans can't pass a basic financial literacy quiz. And 40% of US households can't afford to pay an unexpected bill of just $400 without going into debt. So along comes Larry Fink, the CEO of the world's largest asset manager, BlackRock, which manages $10 trillion for investors around the world. 

In his annual letter to clients, Larry just warned that the world faces a retirement crisis because of two fundamental facts. Thanks to medical innovation and improvements in health care and better lifestyles, people are living longer than ever. But at the same time, most people around the world, not just in the US, most people are not saving enough money to meet their needs in retirement. And that retirement's gonna be longer than ever. The United Nations says that by 2050, twice as many people will be 65 or older. That's 17% of the global population, compared to 8% today. And in the middle of all this, we've reduced the number of people who have pensions. 

Larry wrote that the problem is so big and urgent that government and corporate leaders must stop business as usual and sit around the same table to find a solution. I'm excited that Larry Fink has made this the focus of his annual letter. There's a $4 trillion gap between what Americans have saved for retirement and what they're going to need. 

We all know that most of the money is held by older people. You gain wealth as you age, and that's no surprise. The older you are, the more money you tend to earn. And as you age, you tend to spend less, meaning you add more and more to your savings. And as you age, you benefit from the power of compounding. 

The bottom line, over the next 20 years, $90 trillion is going to be transferred from older people to younger people. And guess what a lot of those families are going to experience as a result of all of this? Lawsuits. Arguments between children who think that one of them got too much and another one got too little from mom and dad when they died. 

Disinherited children are going to be unhappy. Children from a prior marriage. A lot of this is because mom and dad never tell their kids why they're leaving money to whoever they're leaving it to. And this forces the kids to use their imaginations. And people usually tend to imagine the worst. So if you're a financial advisor, tell your clients to do two things. 

First, talk to their kids now about their plans. If the kids understand why mom and dad are leaving money to one child and not another, or more of it to one child than another, that explanation, that understanding goes a long way.  

Second, mom and dad should start to give the money to their kids right now. I mean, it used to be when we grew up, when you talk to a lot of people who are in their 60s and 70s and 80s, their intention is to leave their children, their money after they die, because that's how it happened for them. When my grandparents died, that's when my parents got their inheritance. 

But think about it. My grandparents died in their 70s. My parents were in their 40s. That's okay. In your 40s, getting an inheritance, that's pretty good, because when my parents were in their 40s, their children, me and my brothers, were in college. My parents were spending a lot of money on their lifestyle, and that inheritance came in handy. 

But nowadays, that's not how it's happening. People aren't dying in their 60s and 70s and 80s like they used to. They're now living into their 80s, 90s, and 100s. Which means if you die at 100, by the time you die, your children are in their 70s and 80s. Do they really need your inheritance by then? No, they could take advantage of that money much more effectively now while they're in their 20s, 30s, 40s, and 50s. 

Besides, wouldn't you just have a ton of fun watching them put the money you're giving them to good use? You, as a financial advisor, should talk to your children about not only their plans for who they're going to give money to, but when they're going to start giving it away. This is how we can help offset the challenge that we are facing with America's lack of retirement readiness. 

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On tomorrow's show, could AI fix all this? Plus, an innovative solution that gives you a guaranteed income all the way to age 100. 

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Links from today’s show: 

VISION – Register Now: https://dacfp.com/2024-dacfp-vision/   

Funding Our Future Coalition: https://fundingourfuture.us/  

Employee Benefit Research Institute: https://www.ebri.org/  

National Endowment for Financial Education: https://www.nefe.org/  

American Savings Education Council: https://www.asec.org/  

Jumpstart Coalition for Personal Financial Literacy: https://www.jumpstart.org/  

Institute for Financial Literacy: https://financiallit.org/  

Boys and Girls Clubs: https://www.bgca.org/  

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