When it comes to how well sovereign states support their retirees, the U.S. has a great deal to learn from some much-smaller counterparts, according to a new study.
The eighth edition of the Melbourne Mercer Global Pension Index was released last week, and once again, Denmark and the Netherlands walked away with top scores. They were the sole recipients of an A grade — the only countries ever to earn this score — acknowledging that these small sovereign states provide the best retirement benefits in the world. In contrast, the U.S., like a slow, indifferent student, again brought home a C.
The U.S. is not the only country potentially failing its retirees, the report’s authors say. The MMGPI survey, conducted by the Australian Centre for Financial Studies and consulting firm Mercer, this year surveyed 27 countries covering 60 percent of the world’s population. Among the more than 40 factors used to calculate a country’s ability to ensure its workforce is financially prepared to cope with old age are benefit levels and design, savings, tax support, regulation, and governance. The amount of government debt and population demographics are also taken into consideration. This year’s report issues a strong warning that, taking those metrics into account, governments across the globe need to take immediate action or risk significant financial pressures in the future.
On the second tier of pension performance, with a grade of B, are Nordic countries such as Finland, Sweden, and Switzerland, as well as Chile. Unsurprisingly, emerging-markets countries China, Mexico, India, and Argentina earned Ds for “major weaknesses and/or omissions that need to be addressed,” according to the study. Japan, where there will be one retiree for every 1.44 people by 2040, also garnered this dismal grade, dinged for the low level of household savings and pension coverage as well as the lack of a retirement income stream.
Retirement experts contend that many of the world’s retirement systems are in need of repair, support, and modernization. While some countries have a strong, universal system, others offer a myriad of patchwork solutions that leave many workers falling through the savings-and-safety net.
“To the extent countries don’t adjust the risks of pension inadequacy for aging populations more broadly, it’s going to impact their economies,” Emily Eaton, a principal in Mercer’s international consulting group in New York, tells Institutional Investor.
The MMGPI emphasizes the growing impact of increasing life spans, which average between seven and 14 years longer than they did just 40 years ago. The report offers close to a dozen suggestions to improve the poor grade earned by the U.S.; these include raising the minimum pension for low-income pensioners, adjusting the level of mandatory contributions to increase the net replacement for median-income earners, and reducing pre-retirement “leakage” — disallowing participant withdrawals in participant-directed retirement plans.
“Without changes to retirement ages and ages for eligibility to access social security and private pensions, there will be increasing pressure on global retirement systems to the detriment of the financial security provided to older members of our society,” says David Knox, senior partner at Mercer and author of the global pension report, in a Mercer announcement.
While some of these fixes need congressional approval, other recommendations are now being addressed by U.S. retirement security advocacy groups. For example, the measure to provide access to retirement plans on an institutional group basis for workers who don’t have access to an employer-sponsored plan is already playing out in states like California and Illinois that have created brand-new retirement plans, mostly IRAs, for uncovered workers. Another solution gaining traction is the creation of multiple employer plans, or MEPs, in which a group of small companies pool one large retirement plan for all of their employees. Unlike an IRA, these MEPs would come under ERISA law.
The recommendation that part of a retirement benefit be taken as an income stream is being discussed among proponents of annuitization of defined contribution plans and is already in effect at United Technologies Corp., where plan participants sign up to have their benefits flow into an annuity after age 50, to be distributed upon retirement.
“Our advice to institutional investors is they don’t need to wait for governments to take action. They can do things themselves to help,” Eaton adds, referring to plan sponsors of both defined benefit and defined contribution plans in both the public and private sectors.