The following snippet was sent to me by an industry acquaintance – thank you, Chris – and I’m happy to share it with you. This quote was part of a Bloomberg interview with Larry Fink.

“We don’t spend enough time as a society understanding how bad the retirement system is in this country. I think so much of the anger in this past election is based on people’s fear of their future. People are frightened; they know they haven’t saved enough money for retirement. They’re going to be highly dependent on Social Security—which, if that’s the only source of income, means living in poverty. In addition, the bigger problem many of our cities and states are facing is that their retirement plans are defined benefit plans. Their liabilities are so large, and increasing, especially as we transform deadly diseases into chronic ones. That translates into greater longevity, and—you’re witnessing it every day as an American—underspending on our infrastructure. It’s a direct cause of the financial positions of state and local governments. And it’s only going to get worse.

I believe the recognition of our precarious retirement position is one of the most underappreciated future crises in this country. I think this crisis is going to be much bigger than health care. Health care is immediate. If you don’t have proper health care, it is today’s problem. But as you know—investing, the whole concept of compounding—if you’re not building your nest egg year after year after year, you’re not going to have enough savings to retire with dignity.”

It is refreshing to finally see some recognition of the crisis that is unfolding.  At KCS we’ve been highlighting the likelihood of profoundly negative social and economic consequences that will occur as a result of our failure to prepare our employees for retirement since our inception, nearly 6 years ago.

Where we depart from Mr. Fink is blaming defined benefit plans for the lack of financial resources within various U.S. states to meet social and infrastructure needs.  I blame the actuarial, investment management, and consulting industries for their focus on the wrong objective.  DB plans should be managed with a cost objective and not a return focus. Too much volatility has been injected into the process.

We need to start managing these critically important plans with the right focus, and if we can, we are likely to get more stable contribution costs and funded ratios.  As we’ve said before, we are one equity market crash away from absolute devastation of DB plans. How comfortable are you that this won’t happen after 8 years of a bull market combined with weak U.S. and global growth?  Remember, we already have examples of public DB plans being frozen. We can’t afford to have this “trend” become a tsunami.



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