It’s a sinking feeling to receive a C+ grade in any situation. Unfortunately, America’s retirement system has earned that disappointing grade. The US retirement income system ranked 22nd out of 47 countries in the 15th annual Mercer CFA Institute Global Pension Index (MCGPI), with its index value decreasing from 63.9 to 63.0 in 2023.
This middling ranking reflects concerns about the future of Social Security and the flaws in employer-sponsored retirement plans in the US. “Retirement savings coverage and institutional quality retirement vehicles remain inaccessible to many Americans, creating a significant adequacy gap that needs to be addressed,” says Katie Hockenmaier, a partner at Mercer.
The overall index emphasizes that no retirement system is perfect, especially as the older population increases worldwide. “It is important for all workers to start thinking about their retirement plans now,” says David Knox, lead author and senior partner at Mercer. “With aging populations and rising interest rates on government debt, individuals will need to become more self-reliant in the future.”
The ranking was determined by examining government and private-sector sources of retirement income and using the weighted average of sub-indices that measure adequacy, sustainability, and integrity. Factors such as minimum age requirements for receiving benefits, annuity options, division of assets in a divorce, and benefits during disability or parental leave were considered.
The biggest challenges for the US in achieving a higher ranking are Social Security and savings in 401(k)s and individual retirement accounts. Social Security’s reserves are expected to run out by 2033, potentially reducing benefits for seniors. Additionally, half of US workers do not have access to an employer-provided retirement plan, and gig workers are often excluded from employer systems.
To improve the US retirement system, the index authors suggest increasing Social Security benefits for low-income retirees, improving benefits vesting, limiting access to retirement funds before retirement, and requiring part of the retirement benefit to be taken as an income stream.
While the US may be in the middle of the pack, The Netherlands ranks first in retirement systems with an A ranking and an overall index score of 85. The Netherlands’ system is successful due to its combination of public and private pension accounts, requirements for employer-provided pensions, and individual investment options.
However, all retirement systems face challenges, particularly an aging global population and economic factors such as inflation and rising interest rates. Consequently, individuals must take more responsibility for their retirement security. Artificial intelligence may also play a role in improving pension and Social Security systems by helping investment managers make better-informed decisions.
Overall, the index serves as a starting point for policymakers and citizens to work towards a better retirement future. “There is a long way to go in many jurisdictions to make pension plans function at their best,” says Margaret Franklin, president and CEO of the CFA Institute. “It’s crucial for the long-term financial security of beneficiaries.”
