Government-sponsored retirement programs face a math problem: People are living longer at the same time that younger working-age populations are decreasing. This has contributed to dwindling funds for Social Security and similar retirement/pension systems around the world.
Meanwhile, higher housing and healthcare costs and lower market returns have made affordable retirement “more challenging than ever,” according to Larry Fink, CEO of BlackRock.
Fink made that statement in the Annual Chairman’s Letter he recently sent to investors. The billionaire businessman also warned that the world is headed for a “silent” retirement crisis, The Telegraph reported.
The crisis “doesn’t make headlines or attract attention because it’s not immediate,” Fink wrote. “It’s not this year’s — or even next year’s — problem. But it is a crisis. And the longer we delay the conversation about it, the larger the crisis grows.”
Much of the problem can be traced to the combination of longer life spans and falling fertility rates. In his letter, Fink noted that fertility rates have slipped to an all-time low of 1.7 births per woman in the United States, 1.5 births in Europe and 1.2 in China.
“It will result in a smaller working population and cause income to grow more slowly or even decline,” Fink wrote.
This problem has been building for some time. As the International Monetary Fund (IMF) noted in a 2020 report, many countries have long faced an aging population and shrinking labor force. With fewer people paying into pension and other retirement systems, it is increasingly difficult to ensure that older populations have “decent living standards” in retirement.
In the United States, the problem can be seen in the coming insolvency of Social Security’s Old-Age and Survivors Insurance (OASI) Trust Fund, which funds about 25% of the program’s benefits. That fund is expected to run out of money as early as 2032, leaving Social Security solely reliant on payroll taxes for funding.
The reason the fund is being depleted is that many baby boomers who contributed to Social Security as workers have now reached retirement age and are collecting benefits. They are also living longer than previous populations — and there isn’t enough revenue coming in from the current workforce to make up the difference.
The problem is compounded by lower fertility rates and a smaller workforce. If fertility continues to fall, Social Security will be in even worse fiscal shape than official government projections assume, the Financial Times reported late last year.
Because government retirement programs face funding problems in the future, it is more important than ever for people to build up adequate retirement savings on their own. A good first step is to dedicate yourself to establishing a retirement savings account — and then leaving it alone.
“Even in wealthier countries, many people lack the ability to save; and if they do save, they often use those savings for an emergency, rather than investing for retirement,” Fink wrote in his letter.
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He also suggested that people avoid “over-saving [and] under-investing,” which will not generate the returns necessary to retire “with dignity.” To build up an adequate nest egg, you should seek the higher returns you can get with stock, real estate and other investments in addition to building 401(k) and other retirement savings accounts.
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