However, Emily Eaton, a senior consultant in Mercer’s International Consulting Group, in New York City, tells PLANSPONSOR the U.S. fell, in part, because five countries were added to the index this year, and two of those ranked above the U.S. “When we talk about the U.S. system, it shouldn’t be a focus on score change. We have new countries that rank above the U.S. as well as those countries that already ranked above us previously,” she says.
However, the U.S. ranking does warrant some consideration. According to the MMGPI report, the overall index value for the American system could be increased by:
- raising the minimum pension for low-income pensioners;
- adjusting the level of mandatory contributions to increase the net replacement for median-income earners;
- improving the vesting of benefits for all plan members and maintaining the real value of retained benefits through to retirement;
- reducing pre-retirement leakage by further limiting the access to funds before retirement; and
- introducing a requirement that part of the retirement benefit must be taken as an income stream.
Eaton says the first two are referring to America’s Social Security system. “We looked at Social Security and what the poorest workers get and what middle-income workers are likely to get.”
As for the third recommendation, Eaton says she looks at it like the two sides of a coin. She explains that the younger generation, who are mostly covered by defined contribution (DC) retirement plans, are more likely to move around; they could have four or more different employers by age 30, for example. If DC plan vesting schedules take three or six years for a participant to fully vest, this seems like it’s not a very long time, she notes, but it could be detrimental to younger participants. “We’re seeing the vesting issue become much more of a challenge as the retirement plan landscape shifts from DB to mostly DC and younger participants have more volatile employment. The solution is immediate vesting, something Australia does.” (Australia ranked No. 2 in the MMGPI.) However, Eaton points out that whatever younger participants do get to keep will increase in value over time with investment returns.
On the flip side, participants who have worked for years and are vested, and may even have a DB benefit, see the value of their retirement accounts go down over time as benefits may be frozen at a certain amount. They are invested conservatively and they are drawing down their accounts.
As for introducing a requirement that part of the retirement benefit must be taken as an income stream, Eaton notes that if you look at all countries in the report, there are only six that have either no requirement for taking benefits in an income stream or no tax incentive for doing so.
“Adequacy remains a major concern for the U.S. system,” Eaton says. “Looking forward, as employees become increasingly aware of their accountability for their retirement security, and as employers improve their methods of enabling their employees to make good decisions based on their personal situation, adequacy may improve through private-sector defined contribution plans. There are also a number of proactive regulatory changes that could be made to improve adequacy.”
According to Eaton, regulatory changes could include increasing the tax disincentive for taking distributions of retirement assets instead of rolling them over, or even forbidding the withdrawal of assets at the time of a job change. “We have tax disincentives for participants to take cash rather than roll over, but people do it anyway,” she notes.
Other regulatory changes that could be made to improve the U.S. retirement system are mandatory automatic enrollment, increasing mandatory contributions, and anything the government can do to encourage participation and encourage participants to keep their money in the system, Eaton says.
She mentions that other countries’ scores in the MMGPI have increased due to proactive measures taken in those countries. For example, other countries have increased the retirement age at which individuals can get government benefits to keep up with changing life expectancy. “This provides a double benefit,” Eaton contends. “Employees work longer, so they save longer, and it decreases the amount of time in retirement for which they will need their savings.”
Other countries have also increased mandatory contributions, increased minimum pension levels, and some countries ranked above the U.S. have mandatory occupational private pension plans in addition to government pension systems. For example, in Australia, Eaton notes, employers are required to give employees a superannuation DC contribution or pay a tax that is higher than what they would contribute for employees.
Denmark ranked No. 1 in the index. According to Eaton, some reasons include: it has a mandatory occupational scheme on top of the government system, there’s a small gap between life expectancy and the retirement age, the mandatory schemes are fully funded, and there are measures in place for employees approaching retirement to be able to continue working while accessing some retirement benefits.
Eaton says it is clear that retirement security for Americans is an issue, and the survey has a lot of focus on what is mandated in each country, but even if the U.S. government is not proactive to address the issue, plan sponsors can be.
The Melbourne Mercer Global Pension Index report may be downloaded from here.