Actions Individuals, Employers and Governments Can Take to Improve Retirement Readiness

Advisers can play a role by encouraging actions by plan sponsors and participants.

The most frequently cited retirement concerns are declining physical health (50% global, 44% U.S.) and running out of money (40% global, 49% U.S.), according to research, “The New Social Contract: Empowering individuals in a transitioning world,” a collaboration among Aegon Center for Longevity and Retirement (ACLR) and nonprofits Transamerica Center for Retirement Studies (TCRS) and Instituto de Longevidade Mongeral Aegon.

Only 36% of workers in the U.S. are very/extremely confident that they will be able to retire comfortably. Just 31% of people in the U.S. are very/extremely confident that their health care will be affordable in retirement. Fifty one percent of Americans feel stressed about their long-term financial plans for retirement at least once per month.

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The best route to retirement readiness is starting to save as early as possible and becoming a “habitual saver,” the research report says. However, only 53% of workers in the U.S. say they are habitual savers. Only 28% have a written plan for retirement. These are two key tasks individuals can take to ensure their retirement readiness, according to the report.

The research also found that fewer than half of workers (48% global and U.S.) are currently factoring future health care expenses into their retirement savings needs. And in the U.S., only 41% of workers have a backup plan to provide an income in the event they are unable to work before they reach their planned retirement age. The report urges individuals to adopt healthy lifestyles and create a backup plan for early retirement.

In addition, the report says, people must commit themselves to continuing education to keep their job skills up to date and relevant and to learn how to make informed choices in their retirement planning. Financial literacy is an example of where improvement is needed. The survey found only 27% of U.S. respondents could correctly answer all of the “Big Three” financial literacy questions developed by Drs. Annamaria Lusardi and Olivia Mitchell that test knowledge of compounding interest, inflation and risk diversification.

Roles of the government and employers

Globally, the vast majority recognize that government retirement benefit programs are under strain. In the U.S., only 8% of people believe that Social Security will remain perfectly affordable and that the government should not take any action. “The message is clear that governments need to take action. Whatever the solutions maybe, the reforms must be fair and equitable,” the report says.

Catherine Collinson, CEO and president of nonprofit Transamerica Institute and Transamerica Center for Retirement Studies in Los Angeles, tells PLANADVISER there are many things governments can do. One of the biggest topics currently is expanding coverage, so any reforms to make it easier for employers to offer retirement plans to employees, thereby improving coverage, can help tremendously, she says.

In addition, governments can make it easier for all employers to offer automatic enrollment in retirement plans, and there should be continued efforts to increase portability of retirement accounts when employees change jobs, if leaving assets in the plan is not option, according to Collinson.

Collinson also says, “As much as employers are doing to help employees save, they are doing little to help pre-retirees transition into retirement. Any fiduciary relief to make it easy for plan sponsors to help employers offer employees retirement income options will help.” She also says TCRS has worked on studies about helping employees extend their working lives. “People are living longer, and many will need to work longer. It is untenable to save for a 30 or 40 year retirement,” she says. “Most workers want to transition into retirement—shift from full-time to part time, work in a different capacity, phased into retirement—but most employers do not offer such programs. Thinking of how phased retirement programs will affect nondiscrimination laws and the qualification status of plans, and considering how to manage flexible work arrangements, any public policy reforms to make it easier for employers to offer phased retirement can benefit workers transitioning to retirement.”

Collinson says employers continue to have a profoundly influential role in helping employees save for retirement, but TCRS is seeing in its research an interest level among workers in additional benefits to protect their health and financial situation. Employers can offer physical as well as financial wellness programs.

Voluntary benefits and insurance protection can protect employees against catastrophic events. Employers can offer life insurance, disability insurance and other supplemental insurance.

She believes employers should also instill a sense of lifelong learning in employees. “A four-year degree serving a 30-year career, given the pace of change isn’t realistic,” she says. “Employees need to keep their job skills up to date and relevant, and employers can offer training and development as well as encourage continuing education.

“Especially in today’s world, where the unemployment rate is at historic lows and the labor market is as competitive as ever, employers can differentiate themselves by enhancing retirement benefits and other benefits and offering flexible work arrangements,” Collinson says.

Elements of a “social contract”

The report suggests that the idea of a “social contract” has been central to retirement systems in countries around the world. The traditional social contract is an arrangement involving three pillars: government, employers and individuals—each with a specific set of expectations and responsibilities.

According to the report, nine essential design features of the new social contract include:

  • Sustainable social security benefits – Preserve this fundamental source of guaranteed retirement income for today’s and tomorrow’s retirees.
  • Universal access to retirement savings arrangements – Ensure coverage for employed workers, the self-employed and those with parenting, caregiving, or other responsibilities.
  • Automatic savings and other applications of behavioral economics – Leverage automatic savings features and matching contributions to make it easier and more convenient for people to save and invest for retirement.
  • Guaranteed lifetime income solutions – Educate people on how to strategically manage their savings to avoid running out of money; raise awareness about ways to annuitize all or part of their savings.
  • Financial education and literacy – Improve people’s basic understanding of financial matters, starting in early childhood through adulthood, to help people make informed decisions.
  • Lifelong learning, longer working lives and flexible retirement – Provide tools and resources for reskilling and keeping their skills up to date and options for phased retirement so that people can remain economically active for longer and transition into retirement on their own terms.
  • Accessible and affordable health care – Reinforce healthy aging through quality health care. Provide access to healthy work environments and workplace wellness programs at the employer level.
  • A positive view of aging – Celebrate the value of older individuals and takes full advantage of the gift of longevity.
  • An age-friendly world – Enable people to “age in place” (in their own homes) and live in vibrant communities designed for people of all ages to promote vitality and economic growth.
The findings in the report are based on 14,400 workers and 1,600 retired people surveyed across 15 countries: Australia, Brazil, Canada, China, France, Germany, Hungary, India, Japan, the Netherlands, Poland, Spain, Turkey, the United Kingdom and the United States. The survey was conducted online between January 22 and February 14, 2019.