A few weeks ago, while the final touches were still being put on the 2018 Global Retirement Index report from Natixis, Ed Farrington, the firm’s head of retirement, offered PLANSPONSOR a sneak peek at the results, which go live today.
Overall, Farrington said, an aging population seems to be the greatest challenge facing the retirement systems of developed nations. He pointed to the example of Japan—where 27% of people are already over the age of 65—as a bellwether for what the rest of the developed world can expect to experience in the coming decades, “so long as there is not a significant rethinking of the importance of immigration.” According to the data, without a major policy shift around immigration, Japan will reach 70 retirees per 100 workers as soon as 2050.
“The world has 7 billion people and the average life expectancy is 72 years today and may be as high as 100 for those born in the year 2000,” he warns. “That is fundamentally a new reality for the global retirement system to address.”
Of course, aging demographics are not the only challenge. Retirement security also depends on how nations address critical questions about income and wealth inequality, affordable and accessible healthcare, environmental quality and safety, and the long-term stability of increasingly interconnected financial systems.
The index rankings show countries in the top 10 typically achieved strong performance across all four sub-indices, which include Health, Finances in Retirement, Quality of Life, and Material Wellbeing. According to the report, the top-ranking Switzerland posted top 10 finishes in all four sub-indices, while high-ranking Norway and Canada have top 10 finishes in three of the four sub-indices. The remaining top nations mostly have two sub-indices finishing in the top 10, the report shows, while Australia is the only country in the leading group to have just one sub-index finish in the top 10.
PLANPSONSOR: What are the main reasons why the U.S. has slipped yet again this year to reach 16th?
Farrington: We continue to age at a dramatic clip here in the U.S., as a society, and that is a big part of it. When we look at the number of workers that are paying into the U.S. system per the number of people who are retired, the ratio continues to get worse by the year. This is also true for pretty much all developed countries. The fact is already putting a huge pressure on our system and it will only get worse, here and globally.
I also think it is important to point out this year that we are starting to see the direct impact of climate change on our rankings—how this is already impacting workers and retirees in the U.S. and abroad. Look at Florida, a place thought of by many as the classic retirement destination for U.S. workers. It used to be that a lot of people dreamed about retiring in a warm, coastal community, relying on pensions and Social Security to a large degree, but it is an entirely different picture that individuals face today. Insurance is so much more expensive in these areas, while coastal property values are already going down. We are already seeing rising temperatures impacting quality of life in a negative way for people here in the U.S. Excessive heat events and severe weather are only going to get worse in some of these marquee retirement destinations in the U.S. and abroad.
Finally, the cost of health care delivery and the lack of quality care is dragging the U.S. down significantly in the rankings. There is little sign that this will change in the near-term future, unfortunately.
PS: What stands out about the top-performing nations this year and over time?
Farrington: Norway is an interesting example that helps us to interpret several opportunities and challenges the U.S. is facing on a system-wide level.
Generally in our data we see a tight link between high per-capita income and high levels of income inequality. This is definitely true in the U.S., where there is very high per-capita income relative to the global average, but concurrently we have extremely high income inequality. In fact we are seventh from the bottom on income equality.
The Nordic people have found a way to have both high per-capita income and low income inequality. While hard to replicate, this plays directly into the quality of their retirement system, as does the strong health care system. All three legs of the stool there are strong—the employer contribution, the government contribution and the individual savings.
Ireland is another illustrative example. The country enjoyed a large jump in their ranking this year, moving up seven spots and now sitting firmly in the Top 10. This move was largely based on the employment rate increasing dramatically, and on the fact that they are starting to see higher per capita income show up without really giving up income equality.
You may think, well, we can’t compare ourselves with small countries like Norway or Ireland, but I would push back on that. The Nordic people have made this a social priority and it has paid off. And just think of where Ireland was 10 years ago. New Zealand is the same way. They jumped into the top 10 very quickly following the introduction of the KiwiSaver program some years ago. We should be thinking about these examples and whether we can consider some programs like this here in the U.S.
PS: What other reflections can you make about the long-term slide of the U.S. in these rankings?
Farrington: More than a weakening of our system, I think this slide represents the fact that we have really been treading water for the last decade—since the passage of the Pension Protection Act. For this reason I am strongly in the camp supporting the Retirement Enhancement and Savings Act [RESA].
There is no question that we can do better on a policy level. We have been thinking about and talking about the ideas in RESA for 10 years, and there is actually quite a lot of consensus on some next steps. Everyone seems to like the idea of open multiple employer plans, as a prime example. It feels like politics is stopping policy, frankly, even in areas where there is strong bipartisan consensus. If we don’t address these problems now they will come home to roost.
We absolutely must take action to improve the long-term outlook of the Social Security system, as well. The system is already on the path towards insolvency, and the pressures facing the system are set to get so much more extreme over time. We must do something, soon.
PS: Can you explain why the Material Wellbeing sub-index stands at just 61 (out of 100) for the U.S.
Farrington: I think this is an important point to zoom in on. This score is so low for the United States, dragging down our performance overall quite a bit, because of the severe income inequality we have in this country.
This is all the more sad because this is a country that became great because of the strength of its middle class. So, from a personal standpoint, I find this to be alarming and I believe it is time for a fuller conversation about the impact of income inequality on the health care system and on the retirement system. If we don’t address issues like this, they come home to roost. Having such a high degree of inequality makes it so much more difficult to create broad and effective solutions, and the problems just get larger and larger until they break the whole system.