The state of the U.S. retirement system has garnered criticism on a global stage, as highlighted by recent reports evaluating pension frameworks worldwide. The 2024 Mercer CFA Institute Global Pension Index rated the United States a mere C+ and placed it at the 29th position among 48 assessed countries. This ranking is a step backward compared to previous years, drawing attention to persistent issues relating to retirement readiness for many Americans.
When assessing the robustness of a nation’s retirement system, it’s crucial to consider the various components that contribute to financial security for retirees. The Kerry Index evaluated not just Social Security but also private retirement vehicles like 401(k) plans and individual savings. In contrast to the U.S., countries like the Netherlands, Iceland, and Denmark received top scores, with their comprehensive retirement frameworks covering nearly every worker in their respective populations. This raises questions about specific shortcomings in the U.S. approach, primarily its lack of inclusivity in workplace retirement provisions.
The Mercer report emphasizes that a key factor for the subpar ranking of the U.S. system is the limited access to employer-sponsored plans. Currently, about 72% of private sector workers have access to any retirement plan, and only 53% actively participate in these plans. Christine Mahoney of Mercer argues that while those who are enrolled tend to have adequate plans, a significant number of workers lack any retirement savings vehicle altogether.
The conventional metaphor for the U.S. retirement system is the “three-legged stool,” which comprises Social Security, workplace retirement plans, and individual savings. This framework is intended to provide a well-rounded financial footing for retirees, but it has notable deficiencies. The structural reliance on employer-provided retirement plans creates vulnerability, especially in a workforce characterized by job switching and gig employment. As highlighted by the report, there is a staggering amount of “leakage” in the system, where workers withdraw their retirement funds prematurely, often at rates around 40% when changing jobs. This not only diminishes their eventual retirement savings but also detracts from the potential growth of those savings over time.
Additionally, the leniency in retirement plan withdrawal policies contrasts sharply with systems in higher-ranked nations, where access to funds before retirement is more tightly regulated. These regulations discourage individuals from cashing out and promote long-term savings—an avenue the U.S. could learn from to shore up its ranking.
Social Security serves as a cornerstone for financial support for older Americans, with approximately 90% of individuals aged 65 and older relying on these benefits. The importance of Social Security cannot be overstated; however, the program’s benefit structure often leaves much to be desired. The benefits are tied to a worker’s highest 35 years of earnings, which lays bare the inadequacies for those with inconsistent earnings or those who worked fewer years. Comparatively, countries with more comprehensive public pensions, particularly in Scandinavia, provide higher minimum benefits, offering a more substantive safety net for their retirees.
Policy experts advocate for enhancing the minimum benefit level within Social Security to bolster the retirement security of American citizens, arguing that substantial increases here would be a pivotal step toward rectifying systemic issues.
Recognizing these challenges, policymakers are slowly taking steps to improve the retirement landscape. Notably, 17 states have rolled out auto-IRA programs to counteract the coverage gap, mandating that employers who don’t offer a retirement plan automatically enroll their workers. Furthermore, the Secure 2.0 legislation aims to tackle some of the barriers to effective retirement planning by extending eligibility for part-time workers and revising regulations surrounding the cashing out of 401(k) balances.
While these initiatives illustrate a progressive shift towards improved retirement security, systemic issues remain. The U.S. must create a more inclusive retirement framework that not only expands participation in retirement plans but also protects long-term savings from premature depletion.
The situation of the U.S. retirement system is a complex interplay of opportunity and challenge. While there are glimmers of hope through emerging policies, a significant overhaul is necessary to elevate the nation’s ranking and ensure that all citizens can enjoy financial stability in their later years.