U.S. Pension System Holds onto Top 10 Ranking in Global Index

October 11, 2011 (PLANSPONSOR.com) - The United States’ retirement system has held onto its 10th-place ranking in a global comparison of pension systems, but the sustainability of the system is at risk due to a fall in asset values and a rise in government debt. 

According to the 2011 Melbourne Mercer Global Pension Index, the U.S. system requires further reform to withstand the pressures of its ageing population and help Americans secure sufficient retirement savings. The Index report says many of the world’s retirement systems are under significant stress and even the world’s most advanced retirement income systems require ongoing reform to ensure they’re robust enough to support a rapidly ageing population.

The U.S. index value increased from 57.3 in 2010 to 58.1 in 2011, due to an increase in adequacy, however this was offset by a decline in sustainability. Netherlands held its position as number one on the index. Australia regained its ranking as second in the world, with Switzerland again making up the top three.

Mercer Senior Partner and author of the report, Dr David Knox, said, “In these uncertain economic times the risk of governments not being able to financially support their aging population is becoming more of a reality unless some significant pension reform is made now. The best pension systems adopt a multi-pillar approach to spread these long term risks between governments, employers, and individuals. Such an approach is also particularly relevant in periods of economic uncertainty, as we are now facing.”

According to Arthur Noonan, Senior Consultant in Mercer’s Retirement, Risk and Finance Group: “Much needs to be done to help Americans secure sufficient retirement savings. Among the challenges that the U.S. retirement system faces is the decline in the percentage of employees covered by a defined benefit (DB) plan. The funding deficit of such plans, which at the end of September reached a post-World War II high among S&P 1500 companies, may force additional plans to be frozen or closed if market conditions do not improve.

“Too few Americans are accumulating sufficient assets in their defined contribution (DC) 401(k) plans. 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 retirement years. Finally, Americans may simply have to work longer than in the past in order to accumulate the retirement savings that will provide a secure retirement.”