U.S. Slips in Mercer's Retirement Rankings

A new Mercer study cites increased life expectancy and reduced estimates in funding available for Social Security as primary reasons for the United States' drop in the firm’s 2015 global retirement ranking.

Global retirement readiness rankings are inherently subjective and often controversial, but Mercer says the U.S. is clearly slipping compared with some other developed nations—from 13th to 14th for the United States in the firm’s 2015 global retirement ranking.

Mercer says the drop reflects a continuation of trends from the 2013 ranking, in which the U.S. placed 11th among the 25 countries surveyed. Now in its seventh year, the firm’s Melbourne Mercer Global Pension index (MMGPI) report measures retirement systems against more than 50 indicators, organized under the sub-indices of adequacy, sustainability and integrity.

Emily Eaton, a senior consultant in Mercer’s International Consulting Group, says the U.S. still stands firmly in the middle of the pack for retirement system efficacy, but concerns over the adequacy of the typical level of benefits provided under the U.S. system has dragged down scores, especially after the most recent financial crisis.

“The lack of employer-provided supplemental retirement benefits for many Americans and the relatively low labor force participation rates of our older workers are also contributing factors to the U.S. ranking,” she says. “There have been a series of regulatory changes to address these issues, but additional action could improve the adequacy and sustainability of the U.S. system.”

She notes the 2015 MMGPI “looked beyond the annual rankings to observe changes over the last seven years and assess which pension systems will continue to deliver and which ones are at risk.”

 NEXT: Labor participation a major factor

Both a positive and a negative indicator for individual retirement savers, all of the 11 countries that have been part of the MMGPI since it began in 2009 have experienced an increase in the expected length of retirement, with the average length rising from 16.6 years to 18.4 years since 2009. According to Mercer, just five countries—Australia, Germany, Japan, Singapore and the United Kingdom—have increased their pension age to offset the increase in life expectancies.

Eaton says even these changes were “not enough to halt the increasing length of retirement” among these nations, and that it doesn’t require a degree in mathematics see the troubling connection between longer retirements, slow wage growth and macroeconomic sluggishness.

For the 16 countries that have been part of the MMGPI since the 2011 report, Mercer finds the average labor force participation rate for 55- to 64-year-olds has increased from 57.9% to 62.2% between 2011 and 2015, or just over 1% per year. However, averages can be misleading, Mercer warns, as the labor force participation rate among at-risk older population segments in many countries slid backwards since 2009, most notably in the United States.

“Extending the years that individuals spend in the work force is one of the most positive ways of developing sustainable retirement systems when life expectancies are increasing,” adds David Knox, global pension risk index report author and a senior partner with Mercer Retirement. “While there is a natural limit to the participation rate at older ages, with most countries still below 70%, the scope for significant increases across the world remains, which would improve the sustainability of many pension systems.”

 NEXT: Some universal suggestions 

Overall, Mercer finds, there is a persistent and enormous variety in the level of pension assets held within a given country, ranging from 1.8% of gross domestic product (GDP) in Indonesia and 6.0% of GDP in Austria, to 160.6% of GDP in the Netherlands and 168.9% of GDP in Denmark.

Knox suggests the diversity in pension assets held as a percentage of GDP “recognizes that some countries have very limited private pension arrangements, whereas others have well-developed and mature pension systems.” Therefore, widely applied solutions to the global retirement crisis are likely to be less effective than locally driven initiatives that respond to specific situations and problems.

That said, Mercer suggests there are some common goals that should be kept in mind across geographies and distinct retirement systems. For example, Mercer urges policymakers to consider adding or raising minimum pension benefits for low-income workers while adjusting the level of mandatory contributions to increase the net replacement for median-income earners.

Other potential strategies suggested by Mercer include “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 taking as an income stream.”