U.S. policymakers and employers dealing with a struggling retirement system might learn a few lessons from other countries, where tough choices and government mandates seem to working, according to several new reports.
Some of those lessons are highlighted in a new study from the National Institute on Retirement Security in Washington that looked at retirement systems in Australia, Canada and the Netherlands, and found those countries did more to promote economic security in retirement through universal coverage and risk sharing, among other tactics.
Their examples could help get the U.S. retirement system back on track, said Nari Rhee, NIRS research manager who co-authored the report, “Lessons for Private Sector Retirement Security from Australia, Canada and the Netherlands” with John Turner, director of the Pension Policy Center in Washington. With only 42% of U.S. workers covered by retirement plans, and a large shift to defined contribution plans from defined benefit, “it's not surprising that the U.S. lags behind other advanced nations,” Ms. Rhee said. “I think we have a really big retirement problem in this country.”
While employees in the three countries bear different levels of risk, those risks are pooled among all workers or offset by employers and government to a greater extent than in the U.S., where the individual bears more risk for saving and investing. “In the U.S., it tends to be a little extreme the level of risk that's passed on to workers,” Ms. Rhee said.
In Australia and the Netherlands, universal or quasi-universal employer-sponsored programs provide a substantial supplement to social security income. Australia's universal workplace retirement system has workers bearing investment risk but provides for high mandatory employer contributions that were a gross 9% of pay in the data for the study and will reach 12% in 2019. (There is also an employee contribution.)
The Netherlands' employer-funded system, which provides some of the highest worldwide income replacement rates, is seeing employers shift market and longevity risks toward employees through increased use of hybrid plans, but the risks are shared as a group and over generations, according to the report.
Canada's voluntary pension system has lower coverage than the Australian and Dutch systems, but includes a progressive two-part social security system that replaces more than 70% of lifetime average earnings for low-income workers and 50% for median-income workers.
Another look at worldwide best practices comes from the Melbourne Mercer Global Pension index, an annual report produced by Mercer and the Australian Center for Financial Studies to rank pension systems around the world.
In the 2012 index, which compares 18 of the world's pension systems, the U.S. moved up a notch from the previous year to ninth place, scoring 59 out of 100. The index uses more than 40 indicators to measure adequacy, sustainability and integrity of retirement systems.
“The U.S. system has some good features, (but) it's just that it's not as solid and risk free” as it could be, said Scott Pollack, a principal in Mercer's retirement business based in Boston. “We definitely think there is value in looking at things from a global basis.”
Mercer ranked the countries based on three factors: adequate income replacement, sustainability and system integrity. Mercer officials warned that the U.S. system, already at risk because of rising government debt and falling household savings, will feel further pressure from an aging population. While the 2013 index will not be out until October, Mr. Pollack noted recent gains in the U.S. economy could work in its favor for the 2013 rankings.
Denmark, a newcomer to the Melbourne Mercer Global Pension index in 2012, earned the highest rating for its pension system and became the first system to receive an “A” grade. That grade was based on Denmark's well-funded and well-regulated pension system with a high level of assets and contributions and adequate benefits. Other top-ranked countries were Netherlands, Australia, Sweden, Switzerland and Canada.
The U.S. could boost its score, the Mercer authors said, by raising the minimum pension benefit for low-income retirees, increasing the level of mandatory contributions to defined contribution plans or Social Security and limiting access to lump-sum payments or borrowing against DC balances. Another theme “that we're seeing across the globe,” Mr. Pollack said, is raising the retirement age.
The incidence of asset leakage in U.S. defined contribution plans has been creeping up in the Mercer index, said Arthur Noonan, a senior consultant in Mercer's retirement, risk and finance group, who noted some countries prohibit borrowing against retirement assets or lump-sum withdrawals.
The issue of how other countries control the spending of assets in retirement, called spend down, is also being investigated by the Government Accountability Office in Washington, which will report its findings to Congress next month.
Singapore and Australia are among the countries that require annuities or other ways to provide a lifetime income stream and prohibit lump-sum distributions. “The U.S. system basically is like a sieve,” said Ms. Rhee of the NIRS. “In designing a system, you have to think about not just automatic savings but how to keep it in, and make good investment decisions.”
Good investment decisions, she said, “means you have professionals doing that.” After experiencing problems with its decentralized superannuation system, officials in Australia moved to widespread use of default investment options and put more emphasis on diversification and fees. “They found out that workers were paying a lot for fees, and they needed some more regulation. Now, there is more transparency for fees and diversification,” Ms. Rhee said.
Sen. Tom Harkin, chairman of the Senate Health, Education, Labor and Pensions Committee, hopes to strengthen the U.S. retirement system by introducing later this year his legislative proposal for a universal private retirement system with professional money management to address what he calls “disappearing pensions” while reducing the burden on employers. “Congress must act to rebuild the private pensions system so that every working American has the opportunity to retire with dignity and financial independence,” Mr. Harkin, an Iowa Democrat, said in an e-mailed statement.
Learning from other countries' successes and approaches to retirement security would be a good start, said NIRS Executive Director Diane Oakley. “Right now I'd say our biggest problem is that we don't have a national goal. It seems that all three systems (in the NIRS study) have a retirement income policy in mind. We don't have anything like that in the U.S. We have a theoretical idea of how much replacement income you need, but we don't have any sort of policy to get us there.”
