U.S. lags globally on retirement due to health, quality of life issues

The U.S. lags 19 other countries on retirement security — putting it just behind Belgium and ahead of South Korea — despite recent initiatives designed to help expand plan access and encourage workers to save more.

The country’s relatively low ranking among other wealthy nations is down two positions from last year, due in part to rising inflation and government debt and lower life expectancy, according to Natixis Investment Managers, which Wednesday issued its annual Global Retirement Index.

Across the world, however, “the data presents reasons for renewed optimism about retirement security,” the report noted. “The pandemic is fading in the rearview mirror, inflation is easing in North America and Europe, central bank moves have boosted interest rates, unemployment in key markets is at or near historic lows,” and most countries saw higher scores on retirement.

"The U.S. retirement system is built on shaky foundations — retirement accounts are voluntary, which means that most workers and firms don't contribute, and the commercialized and individualized nature of the accounts means that it is administratively expensive and poorly allocated," labor economist Teresa Ghilarducci, professor at The New School for Social Research and director of the Schwartz Center for Economic Policy Analysis, said in an email.

The countries with the best grades for retirement security — Norway, Switzerland, Iceland and Ireland — retained the same ranks they saw in Natixis’ report last year. Themes in those countries were high marks for health, quality of life and material well-being.

Those three categories, in addition to finances in retirement, are used to assess the overall retirement security for each country, according to Natixis, which built benchmarks for its ongoing index with the help of Core Data Research.

It's not a coincidence that a feature of the some of the top-ranked countries is that they have mandatory pensions for citizens, Ghilarducci said. That's the case in Norway and Switzerland, and most employers in Denmark (10th) and the Netherlands (6th) must also provide pensions. Similarly, Australia (7th) is known for its Superannuation Guarantee, which began more than 30 years ago. Employer- and employee-funded pension systems are effective not only because they ensure coverage and funding, but also because they don't impact public budgets, Ghilarducci said.

Despite getting lower ranking than a year ago, the U.S. has improved on retirement security overall, with higher marks for material well-being. Behind that are declining unemployment rates and stabilizing levels of income inequality, according to Natixis. The country’s position globally in the index this year is the same as it was in 2013.

The country’s highest ranking was for finances in retirement (13^th), followed by material well-being (21^st), quality of life (21^st) and health (25^th).

Nearly half of U.S. investors with at least $100,000 in assets said that inflation “is killing their dreams for retirement,” Natixis stated in an announcement. Additionally, 87% of U.S. retirees said they were worried about inflation.

The future solvency of the Social Security system was also a top concern, and more than half of people surveyed said they “expect to make tough choices and tradeoffs” in retirement, such as living frugally, working longer out of necessity and relocating to areas with lower costs of living.

However, Social Security offers a lot that systems in other countries don’t, such as providing inflation-indexed lifetime income and strong benefits to spouses of workers (50% benefits) who paid into the system, Olivia Mitchell, professor at The Wharton School and executive director of the Pension Research Council, said in an email.

“In the event of the death of the primary earner, the surviving spouse receives 100% of the decedent’s benefits. This is much more generous toward couples than most other developed nations,” Mitchell said. “The U.S. Social Security system also pays benefits that are higher than many perceive, in that a recent study found that the U.S. has the highest score of the elderly reporting they could maintain their standards of living in retirement.”

Her top priority for improving retirement security would be restoring Social Security to solvency, she said.

Ghilarducci pointed to the Guaranteed Retirement Account design she has championed for years — worker-funded accounts that are professionally managed and pay out in the form of an annuity upon retirement. A bill outlining such accounts was introduced in December, Ghilarducci noted.

Other possible improvements include be a national long-term care insurance system, similar to Japan’s, as private coverage in the U.S. is expensive, Mitchell noted. The cost of medical care for retirees in the U.S. is also significantly higher than that for countries across Europe, where few people spend more than $2,000 a year on health care, compared with about 20% here, she said.

Recent policy changes to help improve retirement saving could be slow to make much of a difference, she said. While Secure 2.0 will require new 401(k)s to use automatic enrollment, it does not apply to existing plans.

“The 2027 implementation of the bill’s extended Saver’s Tax Credit will likely help the low-income save more in employer-based plans,” Mitchell said. “The opportunity for plan sponsors to match student loan borrowers with 401(k) contributions seems like a useful developments, although it has not yet been implemented.”

Meanwhile, state initiatives, such as auto-IRAs, will certainly expand retirement plan coverage, “but workers can still opt out, and my research suggests many will.” Additionally, in many cases those accounts will have small balances and could end up being treated as rainy day funds, she said.

In any case, saving for retirement tends to be a priority for those who can afford to do so — something out of reach for folks living paycheck to paycheck, said Jack Towarnicky, of counsel at Koehler Fitzgerald.

“What is ‘best practices’ elsewhere isn’t likely to be ‘best practices’ in America. So, I believe the best solution is to meet workers where they are and morph the 401(k) into a lifetime financial wellness instrument — a plan that provides tax preferred liquidity without leakage along the way to and throughout retirement,” Towarnicky said in an email.

Recent policy changes and state initiatives are barely scratching the surface, he noted. Minor changes to the current system that he favors include clearing up deemed IRA guidance to allow participants to continue to participate in former employers’ 401(k)s, allowing for the use of Roth 401(k)s “without the burden of pre-tax 401(k)” so that Roth accounts could accept contributions from workers and retirees, increasing plan loan limits to as much as $250,000, and allowing plans to prohibit in-service and hardship withdrawals to help keep assets in-plan.

“To succeed at retirement preparation, it must be a priority for policy makers, industry professionals, plan sponsors, employers and participants," Towarnicky said. "Retirement preparation isn’t a top priority for most employers — they are focused elsewhere, same for the majority of American workers.”