U.S. Pension System Ranks 10th in Global Index; Reforms Needed 

 

The U.S. has held onto its 10th-place rank in a global comparison of retirement systems in 2011, the same as the year before (after a decline from sixth place in 2009). But the sustainability of the U.S. system remains at risk because of a fall in asset values and a rise in government debt as measured at the end of the third quarter of 2011, according to the 2011 Melbourne Mercer Global Pension Index, which compares retirement income systems based on their adequacy, sustainability and integrity.

The U.S. retirement system requires further reform to withstand the pressures of its aging population and to help Americans secure sufficient retirement savings, Mercer's analyst warned.

Many of the world’s retirement systems are under significant stress, and even the world’s most advanced retirement income systems require continuing reform to ensure that they’re robust enough to support a rapidly aging population, according to Mercer, a global HR consultancy.

“Much needs to be done to help Americans secure sufficient retirement savings,” said Arthur Noonan, senior consultant in Mercer’s retirement, risk and finance group. “Among the challenges that the U.S. retirement system faces is the decline in the percentage of employees covered by a defined benefit (DB) plan. The funding deficit of such plans, which at the end of September 2011 reached a post-World War II low among S&P 1500 companies, may force additional plans to be frozen or closed if market conditions do not improve."

Mercer Senior Partner David Knox, author of the 2011 report, said the risk of governments not being able to support their aging populations financially will grow unless significant pension reform begins now. “The best pension systems adopt a multi-pillar approach to spread these long term risks between governments, employers and individuals," he noted. "Such an approach is particularly relevant in periods of economic uncertainty, as we are now facing.”

Inadequate Savings

Too few Americans are accumulating sufficient assets in their defined contribution (DC) plans, Noonan added. "Not only are the savings levels inadequate to provide for a sustainable retirement income, but regulations allow participants to borrow against their 401(k) assets, make withdrawals albeit with penalties, or take a lump sum on retirement that can easily be spent leaving them nothing for their later retirement years."

As a result, “Americans may simply have to work longer than in the past in order to accumulate the retirement savings that will provide a secure retirement,” Noonan said.

Recommended Reforms

The overall index value for the U.S. system could be increased, Mercer advised, by:

• Raising the level of mandatory contributions to increase net income replacement for median-income earners.

• Improving the vesting of benefits for all plan members.

• Reducing pre-retirement leakage by further limiting the access to funds before retirement.

• Introducing a requirement that part of the retirement benefit must be taken as an income stream.

Positive responses to common global challenges would include:

• Increasing the state pension age and/or retirement age to reflect increasing life expectancy, now and in the future, thereby reducing the level of costs borne by the publicly financed pension pillar.

• Promoting higher labor force participation at higher ages, including the provision of phased retirement.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related Articles:

Pension Plan Funding Hits Post-World War II Low, SHRM Online Benefits Discipline, October 2011

Six Ways to Reduce Pension Costs and Volatility, SHRM Online Benefits Discipline, October 2011

Global Pension Index Ranks U.S. ‘Below Average,’ SHRM Online Benefits Discipline, October 2009

Global Trend: Automatic Features in Defined Contribution Plans Gain Acceptance, SHRM Online Benefits Discipline, October 2009

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