Why the US lags globally in retirement security

The United States ranks 29th out of 48 countries Mercer and the CFA Institute evaluated for their global pension index published this week.

That equates to a C-plus letter grade, with a peer group of the United Arab Emirates, Kazakhstan, Hong Kong, Spain, Colombia, and Saudi Arabia. All of those countries have systems with “some good features but also ha[ving] major risks and/or shortcomings that should be addressed,” the report stated. “Without these improvements, its efficacy and/or long-term sustainability can be questioned.”

In the case of the US, the system could be improved by raising minimum retirement benefits for low-income retirees as well as by “improving the vesting of benefits for all plan members and maintaining the real value of retained benefits through to retirement,” the report stated.

But there are other steps that would likely be less politically popular, such as reducing access to plan assets before retirement and requiring that some benefits be taken as “an income stream,” such as an annuity.

Nordic countries score particularly highly, in part because of systems that require or strongly encourage greater participation and offer better stronger benefits and greater flexibility to participants.

Many of those with very high retirement scores have requirements that some retirement assets be used to purchase annuities, for example. Countries with the highest marks are the Netherlands, Iceland, Denmark, and Israel.

“What the Nordic countries do well is they offer a really wide variety of options for retirees,” both for the accumulation and decumulation phases, said Ryan Munson, research manager at the CFA Institute. The countries generally have higher contribution limits than the US allows for its workers, and “on the decumulation phase they have annuities that are built in that are low cost, and they can help provide some stability during that drawdown time.”

Of course, annuities are widely available in the US, and more work has been done in recent years to increase access to them in 401(k)s, such as pairing them alongside target-date funds. However, private annuities available here tend to be more expensive and come with more limits than those in countries with mandatory annuities allocations, Munson said.

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Adding more retirement income options would be a longer-term benefit to the US system. A shorter-term improvement would be to fix the Social Security system, whose trusts are on track to be depleted in less than 10 years.

In short, more money needs to go into the system or less needs to come out of it, and the most basic ways of addressing that are by increasing taxes or raising the retirement age.

The future of Social Security is of high concern to many Baby Boomers and older Gen Xers who were born too late to participate in private defined benefit pensions and never contributed enough to defined contribution plans like 401(k)s or 403(b)s, Munson noted.

The country could also do more to provide savings opportunities for people with atypical career paths, including those who take time out of the workforce, have gig jobs, or work part time, he said. Numerous states have launched or prepped programs that require or at least encourage workers to save, such as through automatic IRAs. However, those programs are not yet the norm, and even where they do exist, they can be hampered by contribution limits that are less than those of 401(k) plans.

Retirement security is a widespread concern among workers in the US. A paper published last week by the National Institute for Retirement Security found that it’s one of the rare topics that Americans can agree on across political ideologies. About 80 percent of Republicans, Democrats, and independents said they concur that the country faces a retirement crisis, according to the survey data from NIRS. Over half of those in each party or affiliation said they are concerned about their own financial security in retirement.

About 80 percent of people in each group also said they like the concept of traditional defined-benefit pension plans, according to NIRS.

Still, DC plans are the option most US workers have, and they are also becoming more common globally – even among the highest-ranked countries for retirement security. For DC plans to do the most for retirees, they should be accompanied by a focus on regular income in retirement, the Mercer and CFA Institute paper noted. That includes providing some level of long-term protection for retirees against future risks, as well as addressing cognitive decline, which affects so many late in life. Retirement plans also “must play a critical role,” giving retirees guidance and advice, the authors noted.

“Our pension systems need to change in the face of increasing life expectancies, falling fertility rates, increasing individualism, and changing expectations from better-informed members,” the paper read. “They should ensure that individuals and households receive the best possible financial support during their retirement years.”