The US retirement system gets a C+ in global studies

So much for American exceptionalism when it comes to retirement.

The US earned just a C+ for its retirement system in the 16th annual Mercer CFA Institute Global Pension Index, ranking 29th out of 48 countries. Since the index's inception in 2009, the U.S. retirement system has never exceeded a C+.

Among the big anchors of American's grade are concerns about shortfalls in pension funds and private retirement savings. Like much of the world, the US retirement system must endure the double whammy of declining fertility rates and rising life expectancy.

“It's not just an American problem, it's a global problem,” Holly Verdain, Mercer's US Defined Contribution leader, told Yahoo Finance. “The imbalance between retirees and working people continues to grow…combined with increased life expectancy.”

Only four countries — the Netherlands, Iceland, Denmark and Israel — earned an A ranking for their retirement systems, providing key lessons on how to shore up our system. Finally came India. Provisions of Secure 2.0 that will take effect next year may also address some of our shortcomings.

The problem in the US

The index examined more than 50 indicators to rank each country's retirement system by adequacy, sustainability and fairness. Overall, the researchers considered what benefits retirees receive now, if the system can survive demographic changes, and if private retirement plans are regulated to encourage long-term confidence.

This year, the index score for the United States fell from 63.0 to 60.4, putting it in the same grade level as the United Arab Emirates, Kazakhstan, Hong Kong, Spain, Colombia and Saudi Arabia, although each of those countries was higher overall. Scores The United States earned a C+ for adequacy and a C each for the sustainability and integrity of its retirement system.

Drilling down, the biggest dilemma for the United States comes from pensions and individual retirement savings accounts, the main source of income for American retirees.

Let's start with pensions, which were not nearly as common as they were a generation ago. Still, 21% of workers have one through their employer.

A pension provides a benefit for a specified period of time, such as through the end of a person's life, or, in some cases, even if the surviving spouse is eligible for continued benefits. Because people are living longer, those receiving benefits will receive that money “for a significantly longer period of time than was initially predicted today,” Verdeyn said. “It's a thing.”

On top of that, pensions depend on workers for retiree benefits. But thanks to declining birth rates, fewer workers contribute to these pension systems, resulting in funding shortfalls that still affect public sector employees and workers in some of the industries that provide these retirement benefits.

What remains in Americans' retirement arsenal is savings in individual retirement plans, primarily employer-sponsored plans such as 401(k)s. But based on recent research, Americans are expected to outgrow those savings in about 10 years, Verdeyen said.

So, people either have to save more or work longer, or both, he said. And they are working an average of two years longer. But they are also expected to live another 4.4 years.

“So the increase in life expectancy is more than double the average increase in retirement age,” he said. “So the gap between how much people have saved and how much funds they need to have an adequate retirement is going to widen.”

Social Security, the federal program that all workers pay into throughout their working lives, is the third pillar that helps Americans retire. Like pensions, Social Security is facing a funding problem because of the worker-to-retiree imbalance. Its reserve fund is projected to run out in 2033, at which point the social welfare program will only be able to provide 79% of benefits, a costly cut for many seniors.

“This trend [of longer lifespans and lower birth rates] Both the private retirement system and the publicly funded Social Security put pressure on the safety net,” Verdeyn said.

Read more: Retirement Planning: A Step-by-Step Guide

The Netherlands offers a model

The Mercer report suggests some simple ways to stress the US retirement system. Americans can also pick up some best practices from the world's number one retirement system — the Netherlands.

For starters, all U.S. employers should incorporate the best features of a private retirement system, Verden said, including automatic enrollment, automatic increases in employee savings rates that will provide adequate income in retirement and advanced education.

For example, in the Netherlands, it is “semi-compulsory” for employers to provide retirement plans. Although the government does not mandate this, industrial unions do through collective bargaining agreements. All firms in an industry must adhere to those agreements.

“The big thing is that once an employer-sponsored retirement program is offered, employees in the Netherlands are automatically enrolled,” Verdeyen said. “So this makes participation in the Netherlands mandatory for a very large part of the workforce.”

However, in the United States, one-third of private industry workers do not have access to an employer-sponsored retirement plan.

The Secure 2.0 Act, signed into law by President Joe Biden in 2023, aims to increase participation in the U.S. by having employers automatically enroll their employees with new 401(k) and 403(b) plans, starting in 2025. The law also includes automatic increases in contributions.

“Thus, auto enrollment is going to be mandatory for a large portion of our new retirement plans, which over time, I think should improve our rating in the U.S. index,” Verdeyn said.

The ultimate solution is to provide easy-to-implement ways for employers to turn employee savings into a reliable stream of income. It can be as simple as embedding a payment feature in a retirement plan that pays a monthly payment starting at a certain age to help people delay taking Social Security.

“If people delayed their Social Security benefits between ages 67 and 70, it would increase the Social Security retirement annuity payments they would receive by about 24%,” Verdein 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. It will also eliminate worries about outliving one's retirement savings.

“Defined contribution systems have really only focused workers on their retirement,” says Verdeyn. “But it has fallen short in helping workers through retirement.”

Janna Herron is a senior columnist at Yahoo Finance. Follow him in X @Jannaheron.

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