So much for American exceptionalism when it comes to retirement.
The United States earned just a C+ for its retirement plans in the 16th Mercer CFA Institute Global Pension Index, ranking 29th out of 48 countries. Since the index’s inception in 2009, no U.S. retirement system has ever finished above a C+.
Major factors in the US grade include concerns about the lack of pension resources and individual retirement savings. Like most countries around the world, the U.S. retirement system must endure the double whammy of declining birth rates and increasing life expectancy.
“This is a global issue, not just Americans,” Holly Verdeien, head of U.S. defined contribution at Mercer, told Yahoo Finance. “The disparity between retired and working people continues to widen as life expectancy increases.”
Only four countries – the Netherlands, Iceland, Denmark and Israel – achieved an A rating for their retirement systems, providing important lessons for strengthening their systems. India came in last. The provisions of Secure 2.0, which will take effect next year, may also address some of our shortcomings.
US problems
The index examined more than 50 indicators to rank retirement plans in each country by suitability, sustainability, and completeness. Overall, the researchers examined what benefits retirees currently receive, whether these systems can survive demographic changes, and whether private retirement systems foster long-term trust. We considered whether it is regulated.
This year, the U.S. index score fell from 63.0 to 60.4, putting it on par with the United Arab Emirates, Kazakhstan, Hong Kong, Spain, Colombia, and Saudi Arabia, all of which have higher overall scores. It has become. Score. The United States received a C+ for Retirement System Adequacy and C for Sustainability and Completeness.
Looking more closely, the biggest dilemma for the United States stems from pensions and individual retirement savings accounts, which are the primary sources of income for American retirees.
Let’s start with pensions. Pensions are not as popular as they were a generation ago. Still, 21% of workers have it through their employer.
Annuities pay benefits for a set period of time, such as until the end of a person’s life. Additionally, if the surviving spouse qualifies for continued benefits, benefits may be paid for an even longer period of time. Because people are living longer, people receiving benefits will receive their money “significantly longer than originally predicted today,” Verdeien said. “That’s one thing.”
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In addition, pensions rely on workers to provide benefits to retirees. But thanks to declining birth rates, fewer workers are contributing to these pension plans, leading to funding shortfalls that have a big impact on public servants and workers in the few industries that still offer retirement benefits. It’s affecting me.
The United States received a C+ for its retirement plans in the 16th Mercer CFA Institute Global Pension Index, ranking 29th out of 48 countries. (Photo: Getty Creative) (Steve Smith via Getty Images)
What remains of Americans’ retirement savings is savings in private retirement plans, primarily employer-sponsored plans like 401(k)s. However, according to the latest research, Americans are expected to outlive these savings by about 10 years, Verdayen said.
So people need to save more, work longer, or both, she said. And they worked two years longer on average. However, they are predicted to live an additional 4.4 years.
“So the increase in life expectancy is more than twice the average increase in retirement age,” she says. “This means the gap between what people save and what they need to adequately fund their retirement will continue to widen.”
Social Security is a federal program that all workers pay for throughout their lives and is the third pillar of American retirement. Like pensions, Social Security faces funding problems due to the imbalance between workers and retirees. That reserve is projected to run out in 2033, at which point social welfare programs will only be able to pay 79% of benefits, significantly reducing costs for many seniors.
“This trend (of longer lifespans and lower birth rates) is putting pressure on both private retirement systems and the publicly funded Social Security safety net,” Verdeien said.
Read more: Retirement Planning: A Step-by-Step Guide
The Netherlands provides a model
The Mercer report offers several simple ways to strengthen America’s retirement system. Americans could also adopt some best practices from the Netherlands, the world’s number one retirement system.
First, all U.S. employers should incorporate the best features of private retirement plans, including automatic enrollment, automatic increases in workers’ savings rates that provide enough income for retirement, and better education, Verdeien said. said.
For example, in the Netherlands, it is “quasi-obligatory” for employers to provide retirement plans. The government does not require it, but industry unions do through collective bargaining agreements. All companies within the industry must abide by these agreements.
“More importantly, Dutch employees are automatically enrolled when offered an employer-sponsored retirement program,” Verdayen said. “This makes joining the Netherlands almost mandatory for a large part of the workforce.”
Only four countries received an A rating for their retirement systems: the Netherlands, Iceland, Denmark and Israel. (Photo: Getty Creative) (Alexander Spatari via Getty Images)
However, one-third of private industry workers in the United States do not have access to employer-sponsored retirement plans.
The Secure 2.0 Act, a bill signed into law in 2023 by President Joe Biden, will require employers with new 401(k) and 403(b) plans to automatically enroll employees starting in 2025, increasing the The aim is to encourage participation in the Includes automatic contribution escalation.
“This will result in automatic enrollment being mandatory for the majority of our new retirement plans, which we believe will improve our rating in the U.S. index over time,” Verdayen said. .
The final solution is for employers to provide easy-to-implement ways for employees to turn their savings into a reliable source of income. It could be as simple as building a payout feature into a retirement plan that pays out an amount each month starting at a certain age to help people delay enrolling in Social Security.
“If people delayed receiving their Social Security benefits from age 67 to age 70, the Social Security retirement payments they would receive would increase by about 24%,” Verdayen said.
Read more: What is the retirement age for Social Security, 401(k), and IRA withdrawals?
Employers can 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 outliving your retirement savings.
“Defined contribution plans are really just focused on getting the employee through to the point of retirement,” Verdayen said. “But it falls short in terms of helping workers live until retirement.”
Janna Herron is a senior columnist at Yahoo Finance. Follow her on X @JannaHerron.
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