The sustainability of the U.S. system is at risk because of a rise in government debt and a fall in the household savings rate. The system requires further reform to withstand the pressures of its aging population and help Americans secure sufficient retirement savings.
According to the Index, which looks at 18 countries covering 50% of the world’s population, many retirement systems are under great stress, and even the most advanced retirement income systems need reform. The ranking is based on three factors: the adequacy of the retirement income system to replace preretirement income, the sustainability of that system and its integrity.
“Too few Americans are accumulating sufficient assets in their defined contribution 401(k) plans,” said Arthur Noonan, senior consultant in Mercer’s Retirement, Risk and Finance group. “Not only are the savings levels inadequate to provide for a sustainable retirement income, but regulations allow participants to borrow against their 401(k) assets, make withdrawals—albeit with penalties—or take a lump sum upon retirement, which can easily be spent, leaving them nothing for their later years.”
“Many of the world’s retirement systems are under increasing stress with an aging population, low investment returns and, in some cases, significant government debt,” said Mercer Senior Partner and author of the report Dr. David Knox. “There is no single answer to the best asset allocation for every country. However, a diverse group of assets across the system is likely to provide a better outcome than heavy concentration in bonds or equities.”
According to the report, several steps the U.S. can take to improve its ranking are:
- Raise the minimum pension for low-income retirees;
- Adjust the level of mandatory contributions to defined contribution plans or social security to increase the value of pension payments and bring them closer to replacing preretirement income;
- Improve the vesting of benefits for all plan members and maintain the real value of benefits through to retirement;
- Reduce preretirement leakage by limiting the access to defined contribution funds before retirement; and
- Introduce a requirement that part of the retirement benefit must be taken as an income stream rather than a lump sum payment.
The Index, now in its fourth year and having grown from 11 to 18 countries, looks at both the publicly funded and private components of a system, as well as personal assets and savings outside the pension system. It is a product of Mercer and the Australian Centre for Financial Studies, and is based on more than 40 indicators grouped into three sub-indices: adequacy, sustainability and integrity.
The full Melbourne Mercer Global Pension Index may be accessed here.