America's predatory retirement system is trapped in the Stone Age

BlackRock CEO Larry Fink recently spoke out about how politicians and American leaders are short-changing baby boomers from being able to afford their last years. 

Fink, CEO of the world’s largest asset management firm, argues that the retirement system is completely flawed and exacerbates current challenges. Although seniors face higher rejection rates for mortgages or higher interest rates when they get a loan, bigger issues aren’t being addressed. Multiple actors are creating this crisis, and we need to ask why the American retirement system expects indefinite growth, and what mitigation measures can prevent a widespread loss of wealth.

Although many Americans can boast many freedoms, retirement isn’t one of them. In 2022, nearly half of American households had no retirement savings. High interest rates and inflation are a few factors contributing to this problem

However, policies around retirement also propel this looming economic catastrophe. Since employers have become less likely to provide defined benefit plans, the responsibility to save is now on workers. Alongside this shift, there has been a drastic change in retirement savings. In 1989, half of working households aged 50 to 60 had a defined benefit plan. About three decades later, only a quarter do. 

The country’s dual approach is failing, as Social Security and pensions are becoming less and less effective. 401(k), Roth IRAs and personal retirement accounts have been rocked by inflation, and Social Security can only replace up to 40 percent of income. 

This leaves hard-working Americans struggling financially regardless of how well they save. A recent study analyzing the quality of retirement programs globally rated the American system with a C+, in line with countries like Kazakhstan and Colombia. 

In light of these concerns, financial service professionals are urging reform. Some have suggested increasing the minimum Social Security payment and harsher penalties for pension holders for withdrawing funds early. These suggestions may offer smoke and mirror short-term solutions, but they won’t change the dysfunctional nature of retirement programs. They won’t help any generation of seniors make ends meet.

The American retirement system’s main flaw is its primary reliance on market performance, consumer spending and economic health. Since IRA saving values directly correlate to market conditions, volatile periods can cause almost irreversible damage to a portfolio. This may be bad news for hedge funds, but it is life-changing and disastrous for ordinary people’s retirement. 

Additionally, society is already witnessing how fragile things can become in Japan and China. With some of the lowest birth rates in the world, these two countries are fighting to get by. The new declining population will also directly impact the level of Social Security contributions and fund availability to help the retired. The new generation cannot afford to be left holding the bag. 

The U.S. should be deeply concerned about its aging population, its projected decline in population and its youth being starved as their hard-earned money is needed to solve a retirement problem the politicians have left them.

Considering the inadequate nature of American retirement, a coordinated effort must be made to reduce economic risk and ensure the country’s elders receive the support they need. One of the best ways to handle the aging population is to propose new regulations in finance. Retirement is about creating wealth and comfort. It shouldn’t be necessary for seniors to turn to a historically predatory industry for help. 

It may seem idealistic to propose that American retirement just needs to “do better,” but the system has a deeply misaligned incentive structure that harms all generations. If baby boomers continue losing their wealth to financial “solutions” that widen the wealth gap, their heirs will also receive a raw deal.

As suggested by Fink, we work so hard to make our elders live longer but don’t really care as much about how they would live. For example, we should prevent lenders from taking advantage of seniors, who have above-average credit scores and a responsible track record of paying off debt for decades, by charging more in interest because they don’t have a W-2. 

To spark systemic change, those 65 and older must leverage their collective voting power against lenders and Congress. This can be the first step to ending predatory lending practices and raising awareness about strategies for building an equitable retirement system.

Once America begins to invest in protecting senior wealth, the country could unlock trillions in economic contributions. It could also fuel the development of ethical and accessible programs, finally allowing seniors to retire with dignity.

Sid Mohasseb is an adjunct professor in Dynamic Data-Driven Strategy at the University of Southern California and is a former national strategic innovation leader for strategy at KPMG. He is the author of “The Caterpillar’s Edge” (2017) and “You are not Them” (2021).