The U.S. retirement system faces critical challenges that diminish its effectiveness compared to other countries. Recent evaluations unveil a consistent trend of underperformance, with the United States receiving a grade of C+ and ranking 29th out of 48 countries in the 2024 Mercer CFA Institute Global Pension Index. The systemic flaws within the U.S. retirement framework stem partly from the diverse economic, cultural, and political contexts that shape each nation’s approach to retirement. This article scrutinizes the U.S. system, delves into the contributing factors behind its mediocre ranking, and explores the ongoing efforts to reform it.
The Mercer report encompasses an analysis of public and private retirement funding sources, including Social Security and various workplace saving plans. It reveals that essential improvements are necessary for the U.S. system, akin to Christine Mahoney’s assertion of “a lot of room for improvement.” Despite the apparent simplicity of the U.S. retirement approach, known as the “three-legged stool” — which includes Social Security, employer-sponsored retirement plans, and personal savings — significant shortcomings exist. According to data, many Americans still lack access to employer retirement plans, with only 72% of private sector employees having access by March 2024, and only about half participating.
The encouragement of participation and coverage is essential; without it, many workers are left vulnerable, lacking sufficient resources for retirement. Mahoney juxtaposes the U.S. experience with better-performing nations such as the Netherlands, whose inclusive retirement programs cover nearly all workers. This stark difference accentuates the need for revamping U.S. policies to broaden access and ensure adequate participation rates.
One of the notable barriers within the U.S. retirement framework is the phenomenon known as “leakage.” This occurs when individuals withdraw funds from their retirement accounts before reaching the retirement age, thereby undermining their long-term savings. The Employee Benefit Research Institute reports that approximately 40% of workers cash out their 401(k) balances when they change jobs, with staggering figures suggesting that 85% of those who do cash out end up draining their entire account. While flexibility in accessing retirement savings may benefit individuals facing financial emergencies, this same feature presents a long-term risk that greatly diminishes retirement security.
Workers accustomed to frequent job changes may struggle to amass sufficient savings due to this leakage. Financial experts, including David Blanchett of PGIM, emphasize that fluctuating employment combined with inadequate savings and premature withdrawals severely restricts individuals’ abilities to build a substantial retirement nest egg.
Social Security remains a cornerstone of retirement income for a vast majority of older Americans. As highlighted, nearly 90% of individuals aged 65 and over depend on Social Security benefits as a key source of income. However, the benefits typically reflect a worker’s model earnings over their lifetime, ultimately linking them to their wage history. While the benefits are designed to be progressive—providing a relatively larger replacement for lower earners—concerns arise over the minimum benefit levels compared to other nations that offer more supportive public retirement programs.
Critics argue for an increase in minimum Social Security benefits, stating that enhancing these benefits would fortify retirement resilience across various socio-economic demographics. This proposition seeks to address the gaps faced by lower-income retirees who find themselves reliant predominantly on Social Security.
Policymakers recognize the pressing need for reforming the exacerbated issues within the American retirement system. Efforts are underway at both state and federal levels to tackle coverage gaps and improve retirement savings accessibility. Seventeen states have initiated auto-IRA programs that require employers without existing retirement plans to automatically enroll employees in state-managed plans. This initiative aims to enhance participation rates among underrepresented workers.
Additionally, recent federal enactments, such as Secure 2.0, signify progressive steps in adapting the retirement landscape. The legislation expands eligibility for part-time workers to access 401(k) plans and modifies regulations surrounding cash-outs for departing employees. While these initiatives may not immediately resolve all prevailing issues, they mark a notable shift towards constructing a more inclusive and sustainable retirement system.
The prospects of American workers navigating retirement are contingent on substantial reforms in the existing system. With a C+ rating in a global context, the urgency for change is unambiguous. Addressing coverage gaps, minimizing leakage, enhancing Social Security benefits, and implementing innovative policy measures present opportunities to bolster financial security for retirees. As stakeholders increasingly acknowledge these challenges, the path towards a more equitable and effective retirement system is beginning to take shape, paving the way for a more secure financial future.