The United States is entering a unique period in its demographic history as the large Baby Boomer population approaches and enters retirement—but that doesn’t mean retirement savers here are in uncharted waters. Other countries have already seen population booms and busts, much like the age wave occurring in the United States, giving thought leaders important policy insights.
Ed Farrington, Boston-based executive vice president for retirement at Natixis, points to a February Time magazine cover—a picture of an infant, headlined: “This baby could live to be 142 years old.” That the baby looks worried may be incidental, he says, but with longevity well outpacing savings around the globe, many countries have recognized they need to make adjustments—and some have begun the challenging process.
Farrington suggests some countries will avoid the crisis in retirement unpreparedness, particularly those in Northern Europe that have taken meaningful steps to modernize their health care systems. In fact, he ranks an economy’s health expenditures right up with its savings programs to predict how it will fare in retirement. Especially for the industrialized West, adequate and affordable health care are critical components of a healthy economic future.
For many countries, such as those in Asia, demographic problems loom larger than any solution now in place. Even in Australia—often called a model of success thanks to the widespread use of mandatory savings and annuitization—people aren’t hugely confident they’ll be comfortable in retirement. How are these countries—and those of Northern Europe, for that matter—tackling the situation, and what might the U.S. learn from their efforts? Also, what can plan sponsors and advisers take from the discussion?
One common theme is extending the retirement age. This was done by Japan, China and Belgium to name a few. Arthur Noonan, senior consultant and actuary at Mercer, cites Denmark in particular for taking this step. While some countries, such as the U.S., have upped the age to a fixed number, Denmark took a more fluid approach, linking age and eligibility to life expectancy. Sixty-five today, the state pension age will climb six months a year, from 2024 through 2027, to 67. “If life expectancy continues to improve as it’s been doing, they’ll automatically raise the eligibility age,” he explains.
Denmark was the only nation to receive an “A” on the 2014 Melbourne Mercer Global Pension Index, for its “first-class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity.” To thank is the country’s “good minimum pension—about 34% of the average wage—compared with less than 20% in the U.S.,” says index author David Knox, senior partner and national leader (for Australia) for Mercer’s research practice. “It has great coverage within the system with virtually all workers covered; the level of assets exceeds 150% of GDP [gross domestic product]; the level of mandatory contributions [to private-sector, employer-driven plans]—is more than 12%. In short, everybody is in—a good level of contributions is being set aside now, and [with the help of the public scheme and a means-tested supplement,] the poor are also well-protected.”
Another global survey, Natixis’ 2015 Global Retirement Index, placed Denmark seventh out of 150 countries, versus Mercer’s 25. Still, the top 10% of each were similar, dominated by Northern Europe and Australia.
Australia has faltered a bit since garnering world attention for its “superannuation system,” which leans heavily on the mandatory, private-sector leg of its funding stool. Again, the issue is too many people retiring too early—65-year-olds may start drawing the state’s age pension—with too little savings to go a longer distance. Australians outliving life expectancy felt a shortfall of $780 billion, according to Cerulli Associates data and research from Australia’s Financial Services Council (FSC).
Raising the retirement age to 70 by 2035 has been proposed—a move unpopular with Australia’s citizens. Meanwhile, the state has adopted other measures to attempt to head off these problems—the most promising being MySuper products, says Yoon Ng, Asian research director for Cerulli. These funds are a range of low-cost, simple—often passive—investments to replace employers’ old default option. “The biggest impact will be on fees,” she says. “The average fee was 2% before the introduction of MySuper funds, and the government expects to bring the fee down to 1.0%.”
Also, employers must contribute more to their workers’ superannuation guarantee—similar to an employer match. Whereas they paid in 9% of their employees’ salary in 2013, they now pay 9.5% and will pay 10% in 2025.
Cerulli puts Australia—Japan, too—ahead of most of its Asian neighbors in confronting the problem, which Ng calls “almost universal.” Countries such as China, Hong Kong, Singapore and Taiwan also faced an added complication. The growth of their economies—improved health care, and longevity being a result—has been at the expense of inflation, says the Cerulli Edge. To extend that growth, the governments will likely continue their inflationary policies. In China alone, 160 million people ages 60-plus today need to stretch their inflated cash. By 2050, there will be 687 million people in China over the age of 60, Cerulli says.
Countries in the region have been making reforms. An important first step for China, says Ng, is combining its rural and urban pension schemes, to help narrow the retirement benefit gap. “Secondly, there are moves to eliminate the differences between the contributions of private- and public-sector employees. These reforms are highly significant because of the volume of people and assets involved,” she says.
Hong Kong, like Australia, is introducing core funds—often low-cost passive instruments—to act as the default option, she says, while Singapore is hiking the Central Provident Fund (CPF) minimum sum, the amount that must be kept in the state’s CPF system for annuitization when an individual reaches 55. Set at $80,000 in 2003, the amount should rise to $161,000 this year. “This will mean fewer lump-sum payouts upon retirement and a greater focus on income streams,” Ng says.
In general, Asia will lighten its regulatory load, making it easier to save and invest, sources say. One segment of the retirement industry to gain will be retirement insurance. “Retirement insurance refers to insurance companies focused on providing retirement solutions. This is rather common in Asia as insurance is a very common and important tool for retirement planning,” Ng says.
Another part of Asia has birthed a program showing exceptional promise, says Farrington: New Zealand’s KiwiSaver—particularly because it takes on the future. He attributes much of the West’s retirement unreadiness to “the shift from a defined benefit to a defined contribution world”—to Baby Boomers’ expectation of a retirement like their parents and inadequate education along the way to apprize them of a new reality.
KiwiSaver automatically enrolls all New Zealanders when they start to work—even those under age 18, if their parents give consent, he says. Employers contribute a mandatory match and, as the employee may opt out, the government offers a $1,000 incentive to stay invested.
“That is a long-term play,” he says. “OK, we may have a shortfall right now; we can try and tackle that, isolate that, try and put provisions in place around health care and catch-up schemes. But in the long run, we need to solve the problem in a more permanent way by getting young people to invest early and incent them and make it easy for them to do it.”
Clearly, a second common theme is state compulsion—an idea that meets resistance in the U.S. “I don’t think the U.S. has an appetite for mandatory,” Noonan observes. Auto-enrollment is a third. In Denmark, 90% are covered by private-sector finance” he says. In the U.S., I’d say 50% are covered by private plans.”
Like Denmark, “[The U.S. could] ensure that all workers are putting aside some money now for their future retirement, that this money can’t be accessed for other purposes before retirement,” Knox says. “The contributions can be made by the employer, the employee or a combination.”
Ranking the U.S. system outside the Top 10, Mercer’s index makes specific recommendations, including “raise the minimum pension; … reduce pre-retirement leakage of funds from the system before retirement; … and introduce a requirement that part of the benefit must be taken as an income stream.”
While the U.S. can explore and adapt ideas from either list’s top five, it will never become Northern Europe. “Countries with smaller economies that often benefit from natural resource wealth tend to be able to solve some of these problems in a more efficient way than a country like the U.S. with a very large and multi-faceted economy,” Farrington says, by way of caveat. “It may be a bit of apples to oranges.”
Whatever policy changes may lie ahead, plan sponsors can still exert control where they have it. “You can do things like auto-enroll, auto-escalate; you can make sure you’ve done proper diligence on creating the best investment menu possible,” Farrington says. “Do we wish more of these things were compulsory? Yes, but the plan sponsor can take a look at … all the data available throughout the world on what systems are winning and just take pieces of them that work. They can employ those in their plan, today.”