So much for American exceptionalism when it comes to retirement.
The U.S. earned just a C+ for its pension system in the 16th annual Mercer CFA Institute Global Pension Index, ranking it 29th out of 48 countries. Since the index was introduced in 2009, the U.S. pension system has never surpassed a C+.
The major anchors on US interest rates include concerns about pension financing and shortages of private pension savings. Like most countries in the world, the U.S. pension system must cope with the double whammy of declining fertility rates and increasing life expectancy.
“It’s not just Americans, it’s a global problem,” Holly Verdeyen, Mercer’s defined contribution leader in the US, told Yahoo Finance. “The imbalance between retired and working people continues to grow… coupled with increasing longevity.”
Only four countries – the Netherlands, Iceland, Denmark and Israel – achieved an A ranking for their pension systems, providing important lessons on how we can strengthen our system. India came in last. Provisions of Secure 2.0 coming into effect next year could also address some of our shortcomings.
The problems in the US
The index examined more than 50 indicators to rank each country’s pension system based on adequacy, sustainability and integrity. Overall, researchers have questioned what benefits retirees receive now, whether the system can hold up amid demographic changes, and whether private pension plans are regulated to promote long-term trust.
This year, the index score for the US fell from 63.0 to 60.4, putting the country in the same league as the United Arab Emirates, Kazakhstan, Hong Kong, Spain, Colombia and Saudi Arabia, although each of these countries has had a higher score overall. score. The United States received a C+ for adequacy and a C+ for the sustainability and integrity of its pension system.
Looking deeper, the biggest dilemmas for the US stem from pensions and private retirement savings accounts, important sources of income for American retirees.
Let’s start with pensions, which are not nearly as common as they were a generation ago. Yet 21% of employees have one through their employer.
A pension provides benefits for a specified period of time, such as until the end of a person’s life, or, in some cases, even longer if a surviving spouse qualifies for continued benefits. Because people are living longer, those receiving benefits will receive that money “significantly longer than initially projected today,” Verdeyen said. “That’s one thing.”
In addition, pensions rely on employees to fund retiree benefits. But thanks to declining birth rates, fewer workers are contributing to these pension systems, leading to funding shortfalls that largely affect public sector workers and workers in the few industries that still offer these pension benefits.
What remains in the U.S. retirement arsenal are savings in private retirement plans, mainly employer-sponsored plans like 401(k)s. But based on the most recent research, Americans are expected to outlive these cuts by about a decade, Verdeyen said.
So people either need to save more or work longer, or both, she said. And they work an average of two years longer. But they are also expected to live 4.4 years longer.
“So the increase in life expectancy is more than double the average increase in the retirement age,” she said. “So the gap between how much people have saved and how much they need to fund an adequate retirement will continue to grow.”
Social Security, the federal program that all employees contribute to throughout their working lives, is the third pillar that supports Americans in retirement. As with pensions, social security faces a financing problem due to the imbalance between employees and retirees. The reserve fund is expected to run out in 2033, at which point the Social Security program will only be able to pay out 79% of benefits, a costly cut for many seniors.
“This trend [of longer lifespans and lower birth rates] puts pressure on both the private pension system and the government-funded social security safety net,” said Verdeyen.
Read more: Retirement planning: a step-by-step guide
The Netherlands offers a model
The Mercer report offers some simple ways to support America’s retirement system. Americans could also adopt some best practices from the No. 1 pension system in the world: the Netherlands.
For starters, all U.S. employers should integrate the best features of a private retirement system, Verdeyen said, including automatic enrollment, automatic escalation of a worker’s savings rate that would provide sufficient income at retirement, and better education.
In the Netherlands, for example, it is ‘quasi-mandatory’ for employers to offer pension schemes. Although the government does not make this mandatory, industry unions do so through collective labor agreements. All companies in a sector must adhere to these agreements.
“The bigger point is that once an employer-sponsored retirement program is offered, employees in the Netherlands are automatically enrolled,” Verdeyen said. “That makes participation in the Netherlands virtually mandatory for a very large part of the working population.”
However, in the US, one-third of private sector workers do not have access to an employer-sponsored retirement plan.
The Secure 2.0 Act, legislation that President Joe Biden signed into law in 2023, aims to increase participation in the U.S. by requiring employers with new 401(k) and 403(b) plans to offer their employees starting in 2025 to register automatically. includes automatic escalation of contributions.
“This will make automatic enrollment mandatory for a large portion of our new pension plans, which I think should improve our rating in the index in the US over time,” Verdeyen said.
The ultimate solution is for employers to provide easy-to-implement ways to turn employee savings into a reliable income stream. That could be as simple as embedding a payment feature into a retirement plan that pays out a monthly amount starting at a certain age to help people delay Social Security.
“If people were to delay their Social Security benefits from age 67 to age 70, this would mean a 24% increase in the Social Security annuity benefit they would receive,” Verdeyen said.
Read more: What is the retirement age for Social Security, 401(k) and IRA withdrawals?
Employers could also offer lifetime income features in target-date funds, which are the default investment for most retirement plan participants. That would also alleviate concerns about surviving one’s retirement savings.
“The defined contribution system is actually only aimed at getting employees to retire,” says Verdeyen. “But it has fallen short in helping workers reach retirement age.”
Janna Herron is a senior columnist at Yahoo Finance. Follow her on X @JannaHerron.
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