Data from sources such as the Organisation for Economic Co-operation and Development (OECD) and the Melbourne Mercer Global Pension Index can show how strong a country’s retirement system is with regard to coverage and monetary backing, but those indicators do not measure how individuals actually feel about their retirement readiness.
State Street set out to measure how it feels to prepare for, approach and experience retirement by conducting an online survey, in conjunction with YouGov, across eight countries representing a range of retirement systems. Responses were gathered by 9,451 people at every stage of the retirement spectrum, from those new to the workforce to those later in retirement. It found that the retirement structures with the highest objective rankings did not necessarily correspond to the happiest respondents.
For example, Australia has one of the highest ranked retirement systems, according to the Melbourne Mercer Global Pension Index, receiving a B+, while the U.S. was given a lower “C” grade. However, State Street found that 27% of the working population and those approaching retirement in the U.S. said they were optimistic about their financial situation in retirement, compared to 21% in Australia. Among those already retired, 53% in the U.S. said they were happy in their retirement, compared to 38% in Australia.
State Street’s study found that the key factors driving retirement happiness were a combination of trust in a country’s retirement system stability, a strong feeling of ownership regarding their own outcomes and being well prepared in terms of accumulated retirement assets.
For individuals to trust the retirement system, two conditions must be present: The system should follow a set of understood and enforceable rules and outcomes should be reasonably predictable, the study report says. “In the case of retirement savings structures, these conditions translate into savers’ confidence that the system works and the expectation that by participating in it, they will receive the promised benefit at retirement.”
However, the report says many countries are undergoing significant retirement reforms that introduce confusion and doubt: confusion around how the new systems work and doubt as to whether they do.
The study found that in countries actively transitioning to a defined contribution (DC) retirement savings model, or those in the throes of reforms, workers’ concerns around system stability quickly extend to fears around personal impact, particularly whether they will have to work longer and receive less retirement income than expected. Meanwhile, in the U.S., those savers in a DC plan are very confident and optimistic about their prospects and are generally happy in retirement.
As for ownership, individuals in more mature DC systems recognize that they bear a high degree of personal responsibility for their retirement readiness. Respondents in the U.S., UK, Ireland and Australia are most likely to embrace the concept of personal responsibility for retirement saving. The U.S. ranked highest of all eight countries studied for the percentage of people citing themselves, over an employer, state or pension provider, as the most responsible for their retirement.
Responsibility isn’t only about taking on the task of contributing to a retirement plan; it includes being aware of plan details, according to State Street. This level of awareness is consistent with the degree of DC plan dependency in each country, with 90% of U.S. and 77% Australian workers knowing their current savings levels versus 46% of Dutch and 35% of Italian workers. When it comes to familiarity with the tax benefits associated with retirement savings, 80% of U.S. workers expressed an understanding. With regards to investments, 71% of U.S. workers said they are aware of how their retirement portfolio is invested.
Similarly, when it comes to preparedness, asked to rank their sense of financial preparedness for retirement, the U.S. led, with one-third citing extreme confidence. However, respondents in the U.S. were more likely than those in other countries to say they expect to make sacrifices in retirement in order to make savings last. “Americans are acutely aware of the looming burden of later life health care costs—and how significantly such expenses can alter individuals’ spending reality,” the study report says.
Takeaways for policymakers, retirement plan sponsors and providers
Based on its findings, State Street says it has the formula for retirement happiness and makes recommendations for policymakers, plan sponsors and providers.
To keep trust buoyant, support individuals by:
- Communicating system changes with sufficient advance notice and maintaining messaging on a regular and predictable basis;
- Providing clear and comprehensible illustrations of the probable impacts of the reforms, both to individuals and to the larger societal body; and
- Demonstrating a commitment to a simple, stable system that honors the public’s expectations (this includes adequately funding a defined benefit (DB) plan, if such a construct continues to be part of the retirement savings structure).
Foster a sense of ownership among workers by:
- Establishing and widely distributing a “how to” saver narrative, in which the steps to success are clear and attainable;
- Connecting the impact of saver actions to saving outcomes, such as how changing one’s savings rate, investment allocation or retirement age can affect overall retirement readiness; and
- Providing easy access to online advice tools.
Industry leaders can leverage trust and ownership dimensions to improve employees’ level of preparedness and help workers achieve their version of enough by:
- Providing savers with regular statements showing accrued assets and translating those savings into a projected monthly income to enable people to understand whether they are on track to meet their goals;
- Offering competitively priced and thoughtful savings plan solutions that reflect appropriate risk profiles by savers; and
- Balancing flexibility and security in retirement income solutions that allow retirees liquidity in the early and more adventurous years of retirement and stability when it’s needed most.