Here’s why America’s $39 trillion retirement system gets a C+ grade

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The American pension system may seem reassuring, but it ranks poorly compared to those of other developed countries.

Collectively, Americans had more than $39 trillion in wealth earmarked for old age by the end of 2021, according to the Investment Company Institute.

However, the United States ranks well outside the top 10 in various global pension rankings of industry players, such as the Mercer CFA Institute Global Pension Index and Natixis Investment Managers 2021 Global Retirement Index.

According to the Mercer index, for example, the United States obtained a “C+”. It ranked No. 17 on the Natixis list.

Here’s why the United States is falling short, according to retirement experts.

The United States has a “patchwork retirement design”

Iceland tops both lists. Among other factors, the country offers generous and sustainable retirement benefits to a large part of the population, has a low level of old-age poverty and a higher relative degree of retirement income equality, according to reports, which use different methodologies. .

Other countries, including Norway, the Netherlands, Switzerland, Denmark, Australia, Ireland and New Zealand, also received high marks. For example, Denmark, Iceland and the Netherlands each received “A” grades, according to Mercer’s index.

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Where the United States lags far behind these countries, experts say, is that its retirement system is not set up in such a way that everyone has a chance of having a pension. financially secure.

“Even though we’ve invested $40 trillion, it’s a very unequal, fragmented, and disparate retirement model that we work with in the United States,” said Angela Antonelli, executive director of the Center for Retirement Initiatives at the Institute. Georgetown University. “Some people are doing very, very well, but a lot of others are being left behind.”

Consider this statistic: Only three of the 38 countries in the Organization for Economic Co-operation and Development rank worse than the United States on income inequality among older adults, according to the developed nations bloc.

Indeed, poverty rates are “very high” for Americans aged 75 and over: 28% in the United States against 11%, on average, in the OECD.

Many Americans don’t have a workplace pension plan

The US retirement system is often referred to as a “three-legged stool,” which includes Social Security, workplace provisions such as pensions and 401(k) plans, and individual savings.

One of the main flaws in the structure is the lack of access to employee savings, according to retirement experts.

Just over half – 53% – of American workers had access to an employer-sponsored retirement plan in 2018, according to a recent estimate by John Sabelhaus, senior fellow at the Brookings Institution and assistant research professor at the University of Michigan. That’s an improvement from nearly 49% a decade earlier, he found.

Even though we have $40 trillion invested, it’s a very unequal, fragmented, and disparate conception of retirement that we work with in the United States.

Angela Antonelli

executive director of the Center for Retirement Initiatives at Georgetown University

According to an analysis by the Center for Retirement Initiatives, about 57 million Americans fell into the retirement savings coverage “gap” in 2020, meaning they didn’t have access to a company plan.

The United States has a voluntary retirement savings system. The federal government does not require individuals to save, nor companies to offer a pension or a 401(k). Individuals are also taking on greater personal responsibility for building up a nest egg, as companies have largely moved away from pension schemes.

By contrast, 19 developed countries require some level of coverage, requiring companies to offer a pension plan whether individuals have a personal account, or a combination of the two, according to OECD data. In 12 of the countries, the schemes cover more than 75% of the working-age population. In Denmark, Finland and the Netherlands, for example, the share is close to 90% or more.

In Iceland, where coverage is 83%, the private sector pension system “covers all employees with a high contribution rate that leads to setting aside significant assets for the future,” Mercer writes.

IRAs are not a catch-all for workers without 401(k)

Of course, people in the United States can save for retirement outside of the workplace — in an Individual Retirement Account, for example — if their employer doesn’t offer a retirement plan.

But that doesn’t happen often, Antonelli said. According to the Investment Company Institute, only 13% of households contributed to a pre-tax IRA or Roth IRA in 2020.

Sticking to a plan can help achieve retirement goals

IRAs held nearly $14 trillion in 2021, nearly double the $7.7 trillion in 401(k) plans. But most IRA funds aren’t paid out directly — they were first saved in a workplace retirement plan and then rolled into an IRA. In 2019, $554 billion was transferred to IRAs, more than seven times the $76 billion paid out directly, according to ICI data.

Lower annual IRA contribution limits also mean that individuals cannot save as much each year as they can in corporate plans.

According to AARP, Americans are 15 times more likely to set aside retirement funds when they can do so at work through payroll deductions.

“Access is our number one issue,” said Will Hansen, director of government affairs at the American Retirement Association, a trade group, of workplace retirement savings. Small business employees are the least likely to have a 401(k) available, he added.

“[However]the pension system is actually a good system for those who have access to it,” Hansen said. “People are saving.

But the retirement security offered by those savings is biased toward higher-income households, according to federal data.

Low-income people, on the other hand, “seem more likely to have little or no savings in their [defined contribution] accounts,” the Government Accountability Office wrote in a 2019 report. A 401(k) plan is a type of defined contribution plan, in which investors “set” or choose their desired savings rate.

According to a 2017 Social Security Administration report, only 9% of the bottom quintile of earners have retirement savings, compared to 68% of middle-income earners and 94% of the top quintile.

Overall savings are also “constrained” by weak wage growth after accounting for inflation and rising out-of-pocket spending on items such as health care, the GAO said. Longer lifespans put more pressure on nest eggs.

Social security has structural problems

Social Security benefits – another “leg” of the American three-legged stool – help compensate for the lack of personal savings.

About a quarter of elderly households depend on these public benefits for at least 90% of their income, according to the Social Security Administration. The average monthly benefit for retirees is around $1,600 in August 2022.

“That doesn’t put you much above the poverty line,” Antonelli said of Social Security benefits for people with little or no personal savings.

Social Security Trust Fund valid until 2034, SS Disability fully funded for 75 years

There are also impending structural problems with the Social Security program. In the absence of measures to consolidate its financing, benefits to retirees are expected to decline after 2034; at that time, the program would only be able to pay 77% of scheduled payments.

Additionally, individuals can raid their 401(k) accounts during times of financial hardship, causing what are known as “leaks” from the system. This ability can inject much-needed cash into struggling households in the present, but can subject savers to a shortfall later in life.

The “leakage” factor, coupled with relatively low minimum Social Security benefits for low-income earners and the projected Social Security Trust Fund deficit, “will have a significant impact on the ability of the U.S. retirement system to adequately support its retirees well into the future,” said Katie Hockenmaier, director of U.S. defined contribution research at Mercer.

“There has been a lot of progress”

Of course, it can be difficult to compare the relative successes and failures of pension systems globally.

Each system evolved from “particular economic, social, cultural, political and historical circumstances”, according to the Mercer report.

“It’s hard to argue that the United States is really far behind when there are so many other foreign policies that countries pursue that impact their citizens and their long-term retirement effectiveness,” Hansen said.

Flaws in health and education policies hurt people’s ability to save, Hansen argued. For example, high student debt or large health care bills can cause a US borrower to defer savings. In such cases, it may not be fair to place the blame on the structure of the US retirement system, Hansen said.

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And there have been structural improvements in recent years, experts said.

The Pension Protection Act of 2006, for example, ushered in a new era of savings, where employers began automatically enrolling workers in 401(k) plans and increasing their contribution amounts each year.

More recently, 11 states and two cities — New York and Seattle — passed programs that require companies to offer retirement programs to workers, according to the Center for Retirement Initiatives. These could be 401(k)-type plans or a state-administered IRA, into which workers would be automatically enrolled.

Federal lawmakers are also weighing provisions — such as lowering costs against factors like plan compliance and increased tax incentives — to promote greater adoption of 401(k) plans among small businesses, a said Hansen.

“Over the past 15 years – and now with additional reform considerations in Secure 2.0 [legislation] — there has been tremendous progress in recognizing that there is room for improvement in the design of our US retirement system,” Antonelli said.

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