The US retirement system receives a C+ in the global study

So much for American exceptionalism when it comes to retirement.

The United States received just a C+ for its pension system in the 16th edition of the Mercer Institute's CFA Global Pensions Index, ranking 29th out of 48 countries. Since the index was created in 2009, the U.S. retirement system has never exceeded a grade of C+.

The major pillars at the US level include concerns about pension financing and shortages in private retirement savings. Like most countries around the world, the U.S. retirement system must withstand the double whammy of declining fertility rates and increasing life expectancy.

“It's not just Americans, it's a global problem,” Holly Verdin, head of U.S. defined contributions at Mercer, told Yahoo Finance. “The imbalance between retirees and workers continues to grow…along with increasing life expectancy.”

Only four countries – the Netherlands, Iceland, Denmark, and Israel – received an A rating in their pension systems, which offers key lessons about how to shore up our system. India came in last place. The Secure 2.0 provisions that will come into effect next year could also address some of our shortcomings.

Problems in the United States

The index examined more than 50 indicators to rank each country's pension system according to adequacy, sustainability and integrity. More generally, the researchers considered the benefits retirees now receive, whether the system can survive amid demographic changes, and whether private retirement plans are structured to encourage long-term confidence.

This year, the index score for the United States fell to 60.4 from 63.0, putting it in the same score as the United Arab Emirates, Kazakhstan, Hong Kong, Spain, Colombia and Saudi Arabia, although each of these countries received a higher rate overall. a result. The United States received a grade of C+ for efficiency, and a grade of C for both the sustainability and integrity of its pension system.

Digging deeper, the biggest dilemmas facing the United States come from pensions and private retirement savings accounts, which are the main sources of income for American retirees.

Let's start with pensions, which are no longer as widespread as they were a generation ago. still, 21% of workers They have one through their employer.

An annuity pays a benefit for a specific period of time, such as the end of a person's life, or in some cases, a longer period if the surviving spouse is eligible for continuing benefits. Because people are living longer, those receiving benefits will receive that money “for a much longer period than initially expected today,” Verdin said. “That's one thing.”

The story continues

Furthermore, pensions depend on workers to fund benefits for retirees. But thanks to falling birth rates, there are fewer workers contributing to these retirement systems, leading to funding shortfalls that largely affect public sector employees and workers in the few industries that still offer these retirement benefits.

What remains in America's retirement arsenal are savings in private retirement plans, primarily employer-sponsored plans such as 401(k). But based on the latest research, Americans are expected to outlive those savings by about 10 years, Verdin said.

Therefore, people need to either save more or work longer, or both, she said. They work longer, on average, for two years. But they are also expected to live 4.4 years longer as well.

“So the increases in life expectancy are more than double the average increase in retirement age,” she said. “So this gap between how much people save and how much they need to adequately fund retirement will continue to grow.”

Social Security, the federal program into which all workers pay throughout their working lives, is the third pillar that supports Americans in retirement. Similar to pensions, Social Security faces a funding problem due to the imbalance between worker and retiree. that it A reserve fund is expected It is scheduled to run out in 2033, at which point the welfare program will only be able to pay 79% of benefits, a costly cut for many seniors.

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

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

The Netherlands provides an example

The Mercer report offers some direct ways to support the US retirement system. Americans can also take some best practices from the world's No. 1 retirement system – the Netherlands.

To start, all U.S. employers should incorporate the best features of a private retirement system, Verdin said, which include automatic enrollment, automatic escalation of a worker's savings rate that will provide sufficient income in retirement, and better education.

In the Netherlands, for example, the provision of pension plans is “almost mandatory” for employers. While the government does not authorize this, industry unions do so through collective bargaining agreements. All companies in the industry must adhere to these agreements.

“The bigger point is that once an employer-sponsored retirement program is introduced, employees are automatically enrolled in the Netherlands,” Verden said. “This makes participation in the Netherlands largely mandatory for a very large part of the workforce.”

However, in the United States, A A third of workers are in private industry You cannot access an employer-sponsored retirement plan.

Secure Act 2.0, legislation President Joe Biden signed the law in 2023The program aims to boost participation in the United States by requiring employers with new 401(k) and 403(b) plans to automatically enroll their workers, starting in 2025. The legislation also includes automatic escalation of contributions.

“In this way, automatic enrollment will become mandatory for a large portion of our new pension plans, which I believe over time should improve our ranking in the index in the United States,” Verdin said.

The ultimate solution is for employers to provide easy-to-implement ways to turn workers' savings into a reliable source of income. This could be as simple as including a payment feature in a retirement plan that pays a monthly amount starting at a certain age to help people delay taking Social Security.

“If people delayed Social Security benefits from age 67 to 70, there would be about a 24% increase in the Social Security retirement payments they would receive,” Verdin 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 is the default investment for most retirement plan participants. This would also alleviate concerns about outliving one's retirement savings.

“The defined contribution system has focused solely on getting workers to the point of retirement,” Verdin said. “But it fails to help workers move forward to retirement.”

Jana Herron is a senior columnist at Yahoo Finance. Follow her on X @Jana Herron.

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