A global call to modernize retirement systems

Worrying about the future of retirement is not a uniquely American concern. It is a global phenomenon. Almost half of today’s workers and retirees worldwide believe that future generations of retirees will be worse off than those currently in retirement, according to findings from new global retirement research released today.

In many countries, the traditional social contract for retirement based on the three-legged stool of government benefits, employer-provided pensions and personal savings is crumbling. Longer lifespans are straining government-sponsored retirement programs and at the same time, employers are cutting back on traditional pensions.

“Today, individuals are expected to take on increasing risk and responsibility in self-funding a greater portion of their retirement income,” said Catherine Collinson, CEO and president of Transamerica Institute and the Transamerica Center for Retirement Studies.

Unfortunately, only 43% of workers worldwide and 57% of workers in the U.S. have access to retirement savings plans at work that include employer contributions. And many workers lack the necessary financial literacy skills to make critical decisions about saving for retirement and turning those savings into sustainable retirement income.

“A new social contract for retirement is needed at this time when megatrends are disrupting how people live, work and prepare for a secure retirement,” Ms. Collinson said in releasing the report, “The New Social Contract: A Blueprint for Retirement in the 21st Century.” The report is based on a 2018 survey of 16,000 workers and retirees in 15 countries spanning the Americas, Europe, Asia and Australia. It is the result of a collaborative effort among TCRS, Aegon Center for Longevity and Retirement and Instituto de Longevidade Mongeral Aegon.

The five most disruptive trends cited by respondents worldwide and in the U.S. are: reductions in government benefits (38% global; 26% U.S.); increased life expectancy (27% global; 25% U.S.); volatility in financial markets (24% global; 22% U.S.); changes in labor markets (21% global; 14% U.S.); and the prolonged low interest rate environment (20% global; 14% U.S.).

Ms. Collinson said the essential features of a retirement system designed for the 21st century must include: sustainable social security benefits; universal access to retirement savings accounts; automatic savings and other applications of behavioral finance; guaranteed lifetime income solutions; financial education and literacy; longer working lives; and affordable health care.

Closer to home, those same topics were the subject of discussion last week in Washington during a retirement income roundtable sponsored by the Women’s Institute for a Secure Retirement. Dozens of thought leaders and researchers from financial services companies, government agencies, public policy think tanks and advocacy groups gathered to brainstorm possible solutions to America’s impending retirement crisis, with a focus on the special challenges faced by women given their longer lives and generally lower lifetime earnings.

Shai Akabas of the Bipartisan Policy Center, a D.C.-based think tank, discussed the new Funding Our Future campaign, which is designed to inform the American public about the barriers to retirement security and to call on policymakers to make strengthening retirement policies a top priority. Co-founded by Ric Edelman of Edelman Financial Services, the goal of the Funding Our Future alliance is to make saving easier for all Americans, including those working in the gig economy.​

The coalition also wants to create more straightforward ways for workers to transform their savings into lifetime income and to urge Congress to tackle needed Social Security reform.

Social Security as a cornerstone of retirement security was a key theme of the day and I was honored to discuss this topic at the roundtable. One of the most innovative suggestions came from Gary Koenig of the AARP Policy Institute. Mr. Koenig is the co-author of a proposal to reform Social Security by establishing mandatory add-on savings accounts, which he and his colleagues call Supplemental Transition Accounts for Retirement (START), to provide workers and their spouses with the necessary income to delay claiming Social Security benefits.

The accounts would be funded by employees, employers and a government contribution for low-income households that’s fully paid for with revenue from taxing START distributions. Workers would be required to exhaust their START assets before receiving Social Security benefits. Beneficiaries could begin to receive monthly START benefits as early as age 62 based on how much they would have received from Social Security at that age, and by age 70 would be required to liquidate their account, either through a lump sum payout, rolling it over to an IRA or transferring the balance to a beneficiary’s START account. You can read more about the proposal here.

While no attempts at Social Security reform are expected before the next presidential election in 2020, the clock is ticking. The goals outlined by the New Social Contract report and the retirement income roundtable discussion offer an excellent starting point for creating a new retirement plan for the 21st century.