The best and worst retirement systems in the world: US is just mediocre, survey finds

Must read

It’s a sinking feeling to get a C+ grade under any circumstances. And so it goes for America’s retirement system.

The US retirement income system earned that disappointing grade, according to the 15th annual Mercer CFA Institute Global Pension Index (MCGPI) released Tuesday, coming in 22nd out of 47 countries, with its index value decreasing to 63.0 in 2023 from 63.9 in 2022.

The middling ranking largely reflects the growing concerns over Social Security’s future and the shortcomings of employer-sponsored retirement plans in the US.

“Retirement savings coverage and institutional quality retirement vehicles remain out of reach for many Americans, creating a significant adequacy gap that needs to be addressed,” Katie Hockenmaier, a partner at Mercer, told Yahoo Finance. “More and more often, individuals will have an increasingly important role to play as it relates to their own retirement.”

Still, the overall index highlights that no system is perfect even as retirement readiness becomes more important as the older population increases worldwide.

“It is important for all workers to start thinking about their retirement plans now,” David Knox, lead author and senior partner at Mercer, told Yahoo Finance. “With aging populations and rising interest rates on government debt, it is inevitable individuals will need to become more self-reliant in the future.”

How the ranking was made

The index examined both government and private-sector sources of retirement income and used the weighted average of sub-indices that measure three broad characteristics: adequacy, sustainability, and integrity.

Boiled down, these categories try to ascertain what benefits future retirees are likely to receive; whether existing systems can continue to deliver — notwithstanding demographic and financial challenges — and if the private pension plans encourage long-term community confidence. The review also looks at homeownership and household debt levels.

Read more: How to find out your 2024 Social Security COLA increase

The index takes into account a wide range of factors such as if there’s a minimum age to receive benefits from private pension plans. It looks at whether there is a requirement or an incentive to take the retirement benefit as an annuity or income stream for life. It also scores how accrued pension benefits are considered in the division of assets in a divorce or separation. Another important factor: Do retirement benefits accrue when a worker is on disability or paid parental leave?

Access is key for Americans

The biggest stumbling blocks that kept the US from attaining that A ranking revolve around Social Security and savings in 401(k)s and individual retirement accounts, the biggest sources of retirement income for US citizens.

First, Social Security’s reserves are projected to run out in 2033, at which point the program will be able to pay out just 77% of benefits to seniors. That has repercussions for many workers who plan to rely on Social Security for a major portion of their retirement income, especially lower-income people.

Second, gig workers are left out of employer systems and half of US workers — roughly 57 million people — don’t have access to an employer-provided plan, such as a 401(k) plan, although some states are beginning to address the issue.

“Unfortunately, when workers do not have access to an employer-sponsored plan, they often don’t act on their own,” Angela M. Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University, previously told Yahoo Finance. “Only 5% of workers take the steps to open up a retirement savings account if it is not provided by their employer. If a worker has access to an employer-sponsored plan, participation jumps to 72%.”

Automatic enrollment in 401(k) plans has helped improve participation and boosted total retirement savings, but more employers need to do this. Currently, only 1 in 4 employers offer auto-enrollment now, according to a recent Fidelity Investments report.

Another US retirement problem: Americans can also withdraw retirement savings early through loans or cash-outs, which can ding their future financial security. And the number of workers looting their retirement savings is escalating.

To lift the US ranking, the index authors suggest raising the Social Security benefit for low-income retirees, improving the vesting of benefits for all retirement plan members, reducing withdrawals by further limiting access to funds before retirement, and introducing a requirement that part of the retirement benefit be taken as an income stream.

Room for improvement all around the world

So if the US is middle of the pack, who is the top dog when it comes to retirement? That’s The Netherlands. Its retirement system scored an A, with a lofty 85 overall index score. Iceland (83.5) and Denmark (81.3) took second and third places. Argentina had the lowest index value at 42.3.

One reason The Netherlands gets high marks is that all workers have both a private and public pension account. The public pension — although currently undergoing revisions — delivers a flat rate to all retirees depending on how long they have lived and worked in the country. There are requirements for employers to provide all workers with a pension. Moreover, workers can save with their own investments earmarked for retirement income.

Straight up, though, the report authors note that no system is perfect and all face challenges.

One big one is an aging population globally. We’re entering a period with more people over the age of 65 than under the age of 18. Add to that inflation and rising interest rates that are pummeling pension plans across the world.

FILE - The U.S. Social Security Administration office is seen in Mount Prospect, Ill., Oct. 12, 2022. About 71 million people including retirees, disabled people and children receive Social Security benefits. (AP Photo/Nam Y. Huh, File)

Social Security Administration office in Mount Prospect, Ill., Oct. 12, 2022. (AP Photo/Nam Y. Huh, File) (ASSOCIATED PRESS)

In many countries — including the US — an ever greater share of the responsibility for retirement security now rests on individuals as well, said Margaret Franklin, president and chief executive of the CFA Institute.

“We must do more to prepare individuals to control their financial futures,” Franklin, president of the CFA Institute, told Yahoo Finance. “Gig economy workers and the self-employed are a great example of a cohort who would greatly benefit from increased communications from government and employers, as well as personalized pension products.”

Some overall recommendations to improve retirement systems across the globe proffered by the report’s authors include increasing the coverage of many private pension systems, encouraging people to work a little longer, increasing the level of funding set aside for retirement, and reducing leakage from the system before retirement, according to Knox.

Artificial intelligence could also play a role in boosting pension and Social Security systems moving forward by helping investment managers make more efficient and better-informed decisions, which in turn could lead to higher investment returns for pension plan members, Knox said.

“AI has the opportunity to deliver a higher standard of living in retirement — a worthwhile objective for all pension systems,” said Knox, while also acknowledging data privacy and cybersecurity concerns around AI.

Overall, the index provides a starting point for global citizens and policymakers to ensure a brighter future in everyone’s old age.

“Each year, this index serves as a critical reminder that there is a long way to go in many jurisdictions to make pension plans function at their best,” Franklin said, “and for the long-term financial security of beneficiaries.”

Kerry Hannon is a Senior Reporter and Columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of 14 books, including “In Control at 50+: How to Succeed in The New World of Work” and “Never Too Old To Get Rich.” Follow her on Twitter @kerryhannon.

Click here for the latest personal finance news to help you with investing, paying off debt, buying a home, retirement, and more

Read the latest financial and business news from Yahoo Finance

More articles

Latest article