BlackRock CEO Fink: Pension Underfunding Is Massive Problem In Near Future & Blocks Job Creation

on December 05 2013 10:11 AM
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    Traders work on the floor of the New York Stock Exchange. Reuters
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    BlackRock Chairman and Chief Executive Officer Laurence Fink. Reuters
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Rising U.S. pension costs, as people work longer and die later, is one of the most pressing but underplayed problems facing the U.S. economy in the next decade, BlackRock, Inc. (NYSE:BLK) CEO Larry Fink said in a speech on Wednesday.

Fink’s remarks come in the wake of news from Detroit and Illinois on Wednesday. A federal court ruled that Detroit’s public employees weren’t protected from pension cuts under the city’s bankruptcy reorganization. Illinois state lawmakers cut pension benefits in broad retirement system reforms.

Fink dubbed underfunded pension obligations as key to a broader “retirement crisis,” which, he said “should be our No. 1 national priority."

The chief of the world’s largest asset manager made his remarks addressing a New York city gathering of state treasurers, who were “knee deep” in this crisis, he said.

”This is a critical priority because longevity [of life] is a defining challenge of our age,” said Fink. For someone like Fink, who was born in 1950, average life expectancy was initially close to 60. Now, workers may live closer to 80 years, meaning that they’ll have to retire later and will require more to pull off retirement in relative comfort.

“This longevity issue is going to make our liabilities longer and financially more difficult than many states are forecasting presently,” said Fink. Spending on pensions in the 250 largest cities in the U.S. rose to 10 percent of local budgets in 2012, said Fink.

Several of the largest U.S. local governments have long-term pension liabilities exceeding over 100 percent of annual revenue, said Moody’s Investors Service in a September 2013 report. Illinois has a $81.3 billion pension shortfall, the most among states, while Chicago’s future pension obligations rank at 678% of its operating revenue.

Fink, who co-chairs the powerful Partnership for New York City business lobby, also cited severe pension liabilities in America’s financial center, where annual pension costs rose from $1.8 billion at the start of Mayor Mike Bloomberg’s 12-year reign, to $8 billion presently.

It’s unclear how liberal mayor-elect Bill de Blasio, long perceived as leftist and labor-friendly, will tackle these pension liabilities.

Ironically, medical innovations that have extended life and turned lethal diseases into treatable chronic diseases have worsened America’s financial pension problems, said Fink.

Government Accountability Office (GAO) reports show that underfunded pension liabilities could total $1.6 trillion across U.S. state and local governments. Moody’s puts the figure for states only at $980 billion. Neither take into account longevity or medical advances, according to Fink.

The private sector isn’t doing much better, either. Although corporate benefit plans are better funded, they cover only 14 percent of private sector workers, added Fink. That corporate America has broadly welcomed part-time work without benefits hasn’t helped either, he said.

In another neat argument, Fink linked solving the retirement crisis, usually associated with seniors, to solving youth unemployment. Governments can only promote fiscal stimulus, primarily by infrastructure investment, after they’ve dealt with pressing pension costs, he said.

“The retirement crisis is totally linked to our challenges in our broader economy and creating jobs,” remarked Fink. He estimated that only 40 percent of Americans take part in a retirement plan.

In Detroit, unions suffered a blow as a federal court ruled Wednesday that the state constitution no longer protected pension benefits as sacrosanct. Unions vowed to appeal the decision and continue the fight in court, especially as the city’s Emergency Manager Kevin Orr called for only a small part of the $3.5 billion owed to pension funds to be paid by the city.

The historic bankruptcy will help Detroit attract private investment and jobs once again, when it’s through, said Mike Finney, chief of Michigan state’s Economic Development Corporation, to International Business Times in an interview this summer.

“Based on feedback we’re getting from the business community, they expect that we will come out of this with an opportunity to grow, given the circumstances,” he said. Finney cited the scores of job placements his organization and others have finessed in the private sector, but didn’t discuss pension cuts or reform as an economic stimulus.

In Illinois, the Commercial Club of Chicago business lobby welcomed state pension reform there, arguing it could cut future costs by $160 billion, in an email to IBTimes.

“This bill is for the betterment of Illinois taxpayers, as well as public employees and retirees,” said association chair Ed Liddy, in a statement. “With these reforms, Illinois has taken significant steps to secure the retirements of Illinois’ public employees while freeing funds for education, human services and other critical state programs.”

Illinois has the lowest credit rating of any U.S. state, with a pension- fund gap of almost $100 billion. Reforms there are expected to fully fund the retirement system over 30 years, though it will cut benefits. Illinois unions plan to challenge the state legislation in court.

Countries like Australia have fared better on handling pension costs, with major reforms taken several years ago, according to Fink. The U.K., Sweden, Netherlands and Israel are all tackling this problem, while the U.S. remains in “denial,” he said.

Still, a booming U.S. stock market has helped many pension-fund assets grow beyond prerecession peaks, to reach record highs this year, reported Reuters. Until fixed income interest rates rise, investing in volatile but bullish equities could be a better bet for pension funds, Fink added in his talk.

BlackRock is the world’s largest asset manager, handling assets worth more than $4.1 trillion. The company also manages over 7,000 investment portfolios worldwide and counts dozens of Fortune 100 companies as its clients. The company also advises pension funds. 

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