U.S. Retirement System Barely Holds Top 20 Spot

February 25, 2014 (PLANSPONSOR.com) - The United States narrowly holds its spot among the top 20 nations globally in its capacity to meet retirement security needs and expectations.

According to the 2014 Global Retirement Index, published by Natixis Global Asset Management, the U.S. scored 19th among 150 nations analyzed, as the benefits of increasing U.S. economic stability are moderated by the potential for rising interest rates and inflation, as well as persistent income inequality.

“It’s important to remember the index is not simply focused on retirement savings, it’s a combination of factors,” Edward Farrington, executive vice president and leader of retirement and offshore sales at Natixis Global Asset Management in Boston, tells PLANSPONSOR. “What’s missing for us is just to expand opportunities for retirement savings. We need to find ways to incent people to save more for retirement so they have a pool of assets that will finance them to live longer than their parents.”

The 2014 Global Retirement Index is based on an analysis by Natixis Global Asset Management of 20 key trends across four broad categories: Health and health care quality, personal income and finances, quality of life and socio-economic factors.

Here is how the U.S. fared in each of the four sub-categories that were analyzed:

  • Health (ranks 21st): The U.S. spends more per-capita on health care than any other nation. However, life expectancy is lower than in most advanced Western countries, and access to medical care—despite recent reforms—remains limited primarily due to cost obstacles. Austria, Germany and France are the world’s top health care leaders.
  • Material well-being (36th): Americans enjoy the sixth-best per-capita income in the world, but two factors are keeping the U.S. from gaining ground in this category, including a high level of income inequality (81st) and persistent unemployment. Norway, Luxembourg, Austria and Kuwait are the category leaders.
  • Finances (22th): Government indebtedness is one of the report’s new sub-measures and the U.S. ranks among the world’s 10 worst nations on this metric. Additionally, macroeconomic concerns over rising inflation and interest rates held back the U.S. score in this category. On a positive note, the U.S. showed improvement in the overall strength of its financial institutions and in the area of tax pressure. Global pacesetters in the Finances category include Chile, Australia, Costa Rica and Bahrain. Each of these nations has benefited from low government indebtedness, low inflation, a positive interest rate environment and better-than-average bank loan performance.
  • Quality of life (24th): While Americans are generally satisfied with their quality of life, the U.S. gets mixed reviews on its environmental policies. Switzerland, Norway and Denmark lead in overall quality of life. 

Farrington agrees the fact that U.S. spending on health care is not commensurate with outcomes is holding the country back from ranking higher on the list. However, he finds it interesting how much more responsible individuals are for their retirement in the U.S. “This indicates a need for strong advice,” he says. “There are so many challenges for individuals trying to achieve the lifestyle they want in retirement, enhanced education and advice are needed, either in the workplace or on their own.”

According to Natixis, the optimal pension system for any country depends on a variety of economic, social, cultural and political factors. However, the policies and practices adopted in some regions that rate highly could hold valuable lessons for other nations, such as the U.S., which needs to shore up its retirement system.

Many of the top countries in this year’s index have demonstrated a commitment to innovation and have emphasized simplicity in their retirement scheme’s overall design and structure. Many also have proactive governments that have shown a willingness to come together and take bold policy stances in their ongoing efforts to stabilize retirement security for their citizens.

The bottom line is that individuals, employers and government—the three legs of the retirement savings stool in every nation—each have a key role to play in improving the overall state of savings and security. Individuals need to take a more proactive, personal role in planning and saving; employers need to be more flexible and open to programs that can broaden coverage (more than half of all U.S. workers still aren’t covered by employer plans); and policymakers need to work together to institute meaningful reforms that can drive improvement. Asset managers and financial advisers have key roles to play as well, through education and innovation.

Switzerland took the top spot in this year’s list. According to information obtained from Farrington and Natixis, Switzerland’s top ranking in the 2014 index is based primarily on rising incomes, strong and stable financial institutions and a high overall quality of life. In addition, Switzerland has a solid pension model, consisting of three pillars: A federal old-age/PAYGO system, funded occupational pensions and funded private pensions.

Farrington feels it’s a combination of programs at the federal level and expanding access to retirement savings that will move the U.S. forward.

“It is interesting that we are still in this place, and until we tackle some of these issues—expand access, incent savings and expand education—we’re going to stay here,” he says. He hopes the U.S. will also improve with policy solutions.

For a more detailed overview of the Natixis Global Retirement Index, including the rankings of all 150 nations evaluated, go to www.durableportfolios.com.