Here’s why the $39 trillion U.S. pension system gets a C+

Here's why the $39 trillion U.S. pension system gets a C+
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The US pension system may look clean, but it ranks poorly compared to other developed countries.

In total, Americans had more than $39 trillion in retirement savings at the end of 2021. according to to the Investment Company Institute.

However, the US is well outside the top 10 in various global pension rankings as industry players. Mercer CFA Institute Global Retirement Index and Natixis Investment Managers 2021 Global Retirement Index.

According to the Mercer index, for example, the United States received a “C+”. It took place in no. 17 on the Natixis list.

Here’s why the U.S. is lagging behind, according to retired experts.

The US has a “patchwork pension design”.

Iceland tops both lists. According to reports using various methodologies, among other factors, the country provides generous and sustainable pension benefits to a large portion of the population, has a low level of old-age poverty and a higher relative degree of retirement income equality. .

Other nations also received high marks, including Norway, the Netherlands, Switzerland, Denmark, Australia, Ireland and New Zealand. For example, Denmark, Iceland and the Netherlands each received “A” grades according to the Mercer index.

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Where the U.S. largely lags behind these countries, experts say, its pension system is not designed to ensure that everyone has the chance to retire financially secure.

“Even though we have $40 trillion in investments, it’s a very uneven, fragmented, patchwork pension design that we’re working with in the United States,” said Angela Antonelli, executive director of Georgetown University’s Center for Retirement Initiatives. “Some people are doing very, very well, but many others are falling behind.”

Consider this statistic: Only three out of 38 countries are members of the Organization for Economic Co-operation and Development ranks worse Older than the United States in income inequality among developed countries.

Indeed, poverty rates for Americans 75 and older are “very high”: 28% in the US, compared to an OECD average of 11%.

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Many Americans do not have workplace retirement plans

Even though we have $40 trillion in investments, this is a very uneven, fragmented, patchwork pension design that we operate in the United States.

Angela Antonelli

Executive Director of the Center for Retirement Initiatives at Georgetown University

According to the Center for Retirement Initiatives, in 2020, an estimated 57 million Americans fell into a “gap” in retirement savings, meaning they did not have access to a workplace plan. analysis.

There is a voluntary retirement savings system in the United States. The federal government does not require individuals to save or businesses to offer pensions or 401(k). As businesses largely move away from retirement plans, individuals also take on more personal responsibility to build a nest egg.

In contrast, 19 developed countries, according to the OECD, require businesses to have some level of coverage by offering a pension plan with an individual personal account or a combination of both. History. In 12 countries, measures cover more than 75% of the working population. For example, in Denmark, Finland and the Netherlands, this share is about 90% or more.

In Iceland, where coverage is 83%, the private sector pension system “covers all employees with a high contribution rate, which leads to significant asset allocation for the future,” writes Mercer.

IRAs are not attractive to workers without a 401(k).

Of course, people in the U.S. can save for retirement outside of the workplace—for example, in an individual retirement account—if their employer doesn’t offer a retirement plan.

But that doesn’t happen often, Antonelli said. According to the Investment Company Institute, only 13% of households contributed to a pre-tax or Roth IRA in 2020.

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IRAs held nearly $14 trillion in 2021, more than double the $7.7 trillion in 401(k) plans. But most IRA funds aren’t given outright—they’re first held in a workplace retirement plan and then transferred Rolled into the IRA. According to ICI, $554 billion was rolled into IRAs in 2019—more than seven times the $76 billion invested directly. History.

Lower annual IRA contribution limits also mean individuals cannot save that much every year as they can in workplace plans.

Americans are 15 times more likely to hide their retirement funds when they can do so at work through payroll deductions. according to For AARP.

“Access is our No. 1 issue,” Will Hansen, chief government affairs officer for the American Association of Retired Persons, a trade group, said of workplace retirement savings. Employees of small businesses are the least likely to have a 401(k) in place, he said.

“[However]the pension system is actually a good system for those who have access,” Hansen said. “People are saving.”

But according to federal data, the retirement benefits offered by this trust are targeted at high-income families.

Low-income earners, by contrast, “seem more likely to have little or no savings of their own. [defined contribution] accounts,” the Government Accountability Office wrote in 2019 report. A 401(k) plan is a type of defined contribution plan whereby investors “determine” or choose their desired savings rate.

According to the Social Security Administration, only 9% of wage earners, 68% of middle earners and 94% of the highest quintile have retirement savings. report since 2017.

After accounting for inflation and rising out-of-pocket costs for items such as health care, overall savings are also “limited” by lower wage growth, the GAO said. Longer lifespans put more pressure on nest eggs.

Social security has some structural problems

Social Security benefits—another leg of America’s three-legged stool—help make up for shortfalls in personal savings.

About a quarter of elderly households receive at least 90% of their income from these public benefits, according to To the Social Security Administration. The medium The monthly allowance for retirees is approximately $1,600 starting in August 2022.

“It doesn’t put you much above the poverty level,” Antonelli said of Social Security benefits for people with little or no personal savings.

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There are also some expected structural problems with the Social Security program. Unless action is taken to strengthen funding, benefits for retirees are expected to decline after 2034; program at that moment would be able to pay only 77% of the planned payments.

In addition, individuals can raid their 401(k) accounts during times of financial distress, causing what is called a “leakage” out of the system. This ability can inject much-needed cash into struggling households now, but leave savers short-changed later in life.

The “leakage” factor, combined with relatively low minimum Social Security benefits for lower earners and projected shortfalls in the Social Security fund, “will have a significant impact on the ability of the US pension system to adequately provide for its retirees. future,” said Katie Hockenmaier, director of U.S. fixed-income research at Mercer.

“There is a lot of progress”

Of course, it can be difficult to compare the relative successes and failures of pension systems globally.

According to the Mercer report, each system developed out of “particular economic, social, cultural, political, and historical circumstances.”

“It’s hard to say that the U.S. is really far behind when there’s a lot of foreign policy that countries have on their citizens and how effective their retirement will be in the long run,” Hansen said.

Hansen argued that flaws in health and education policies affected people’s ability to save. For example, a high student debt load or large health care bills may cause an American borrower to delay saving. Hansen said in such cases it may not be fair to place the main blame on the structure of the US pension system.

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According to experts, there have been structural improvements in recent years.

For example, the Pension Protection Act of 2006 ushered in a new era of savings, with employers automatically enrolling employees in 401(k) plans and increasing their contribution amounts each year.

Recently, 11 states and two cities—New York and Seattle—passed programs requiring businesses to offer retirement plans to employees. according to To the Center for Retirement Initiatives. They can be 401(k)-style plans or state-managed IRAs where employees are automatically enrolled.

Federal lawmakers are also considering provisions such as cost reductions versus factors such as increased plan eligibility and tax benefits to encourage greater adoption of 401(k) plans among small businesses, Hansen said.

“In the last 15 years – and now with additional reforms Secure 2.0 [legislation] “There has been tremendous progress in recognizing that there is room to improve the design of our U.S. pension system,” Antonelli said.

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