Lessons From Top-Ranked Retirement Systems
The Swiss system ranked No. 1 in the survey by Natixis Global Asset Management, which examined 20 factors in four subcategories in retirement: health, material well-being, quality of life and finances. The U.S. system ranked 19th (see “U.S. Retirement System Barely Holds Top 20 Spot”).
“Developing countries are facing very similar sets of circumstances,” says Edward Farrington, executive vice president of Natixis Global Asset Management, U.S. distribution. “This spurs the conversation on retirement, and it also tries to give a larger picture, rather than just the financial one, of what it’s like to be a retiree in different parts of the world.”
Farrington tells PLANSPONSOR, “Populations are aging and [countries are] facing this moment of considering how an aging population will respond, how they’ll move from accumulating assets in their working life to spending those assets and being retired.”
Switzerland’s retirees depend on a three-pillar system. The first is the basic state pension, similar to Social Security, which draws on mandatory contributions from all employees, including self-employed workers, older than age 20. The second pillar is a workplace-based funded pension plan. Employers contribute an amount equal to the employee’s contributions, though very large companies may be quite generous and contribute two or even three times the amount, according to Rafael Lalive, professor of economics at the University of Lausanne, who is writing a paper about Switzerland’s retirement system for the National Bureau of Economic Research (NBER).Nearly all employers give a pension, Lalive tells PLANSPONSOR, since workers who earn more than 23,000 Swiss francs ($26,000) are obligated to pay into this second pillar system. Overall, Lalive says, most people can end up with about two-thirds of what they earned in their last job. The remaining one-third of income replacement can come from the third pillar, a system of optional, private retirement accounts.
Last year, Switzerland took second place in the index, with Norway at the top. Several reasons could account for the two countries swapping places in this year’s index, Farrington says, among them a substantial improvement in income inequality among the Swiss. “It’s a topic that has garnered a fair amount of political attention in Switzerland over the last few years.” Also, the Swiss health index has high ratings for health expectancy per capita and physicians per capita, Farrington notes. Other contributing factors include rising incomes, the stability and strength of financial institutions, and high overall quality of life.
The elements that make Switzerland’s system so successful, Farrington feels, are its simplicity, use of automatic enrollment, access of plans and the incentives.As for what the U.S. is lacking, Farrington says, “We have overall underperformance in government indebtedness. A rise in overall inflation and income inequality caused the U.S. to lose ranking. In health expenditures, we spend more than others, but we don’t have the commensurate outcomes.”
The road forward, Farrington feels, is extending access to workplace savings for the 7 million part-time and small-business workers who lack an employer’s retirement plan, through proposals such as myRA. The U.S. needs strong participation from all three parties, he says: the government, employers and individuals. He is in favor of incentives for saving and would like to see education that teaches early about the power of compounding and saving at the beginning of an individual’s work life.
Policymakers on both sides generally agree that the U.S. must address these issues, he says. And countries that have addressed them now see the fruits of their labors.
As another example of a system that is working, Farrington points to New Zealand’s KiwiSaver program, which rocketed the country from 22nd to ninth place in this year’s index. New Zealand’s program is mandatory, and there is an incentive to begin the work savings program—the government contributes $1,000 when a worker enters.
Countries should examine each others' systems to see what works, Farrington suggests. “All of us can learn from each other. If we think more broadly and try to see what we can learn as a country, we can shorten the curve on getting this right.”