US retirement income system is only slightly above average, report reveals

The system that millions of Americans rely on for their retirement income is only slightly above average and may require reform.

That’s according to the Mercer CFA Institute Global Pension Index, which looks at 47 of the world’s retirement income systems to identify weaknesses and suggest ways to make them better.

The U.S. system has a C+ rating and scores 63.0 overall, putting it just ahead of the 62.9 global average, but behind countries including Canada, the UK, Australia, Singapore, Germany, Chile, and Uruguay. In position terms, the U.S. is at 22 out of 47.

It’s mid-range spot means that the U.S. system “has some good features but also has major risks and/or shortcomings that should be addressed; without these improvements, its efficacy and/or long-term sustainability can be questioned.”

The system scores a B for adequacy, C+ for sustainability, and C for integrity.

IMPROVING THE SYSTEM

The report says that it could be improved by:

• Raising the minimum pension for low-income pensioners
• 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 access to funds before retirement
• Introducing a requirement that part of the retirement benefit be taken as an income stream

Katie Hockenmaier, partner and director of US defined contribution research at Mercer, commented that there are promising opportunities for progress amidst the ongoing efforts to improve retirement security in the U.S.

“The implementation of SECURE 2.0 and the advancements in generative AI are expected to play a significant role in driving this progress. By combining regulatory initiatives with technological innovations that expand access to financial planning, we anticipate improvements in areas such as retirement plan leakage, access, and coverage,” she said.

However, the 24^th place ranking for adequacy means urgent action is required, especially as retirement savings coverage and institutional quality retirement vehicles remain out of reach for many Americans, creating a significant adequacy gap.

“While SECURE 2.0 is a step in the right direction by addressing access, particularly for part-time workers, employers can take this further by thoughtfully structuring matching and vesting requirements to help increase contribution and engagement with retirement plans,” Hockenmaier said.

WORLD BEATING

The top-ranked system is the Netherlands which has a flat-rate public pension and quasi-mandatory earnings-related occupational pension schemes linked to industrial agreements. Iceland and Denmark complete the top three.

“The average age of populations around the world continues to rise in many markets, mainly more mature markets,” said Margaret Franklin, president and CEO at the CFA Institute. “Inflation and rising interest rates have created a new market dynamic that poses significant challenges to pension plans. We also see continued fracturing as it relates to globalization. These are just a few of the increasingly complex challenges that pension funds face that impact retirees in significant ways.”

She added that investment professionals have an important role to play in preparing people for greater involvement in their own retirement planning.

AI IMPACT

Can artificial intelligence improve pension and social security systems and provide people a better quality of life in retirement?

The Mercer CFA Institute Global Pension Index report also considered this.

“The ongoing expansion of AI within the operations and decisions of investment managers could lead to more efficient and better-informed decision-making processes, which could potentially lead to higher real investment returns to pension plan members,” said David Knox, senior partner at Mercer and lead author of the study. “AI also has the potential to improve member-engagement and help individuals make long-term decisions about their financial decisions. Both advances should improve retirement outcomes.”

However, the research also highlighted risk in AI’s involvement in the retirement income space including modeling challenges and ethical concerns as well as the need for optimal data privacy and cybersecurity.

“AI by itself is not the complete answer. There will always be a need for human oversight. Despite these risks, AI has the opportunity to deliver a higher standard of living in retirement — a worthwhile objective for all pension systems,” Knox concluded.