Report Offers Suggestions for Improving the U.S. Retirement System

Dramatically aging populations, declining birth rates and a lack of robust retirement systems will see many countries struggle under the burden of providing adequate pensions to their senior citizens without drastic action, the Melbourne Mercer Global Pension Index (MMGPI) suggests.

The United States overall index value rose slightly in 2016, to 56.4, from the prior year’s value of 56.3 in 2015.

However, the report notes that as a country with a lower-middle rating of C, the United States retirement income system has real challenges to overcome. In the context of the other countries evaluated, the United States was considered to be a system that has some valuable features; however, it also has major risks and/or shortcomings that need to be addressed. There is considerable work to be done to achieve the coveted “A Grade,” only ever held by Denmark and Netherlands.

This year, the MMGPI has looked at the impact of rapidly aging populations, and the preparedness of countries’ retirement systems to deal with the significant financial pressures this presents.

Author of the report and Senior Partner at Mercer David Knox said the impact of longer life expectancy, combined with global declining birth rates, is much more significant than has been recognized by many governments and communities.

“This year’s report includes a projected old age dependency ratio which will raise alarm in many regions. The range of the ratio is stark—predicting that in South Africa there will be one retiree for every 7 people of working age while in Japan the number drops to one retiree for every 1.44 people of working age by 2040,” he says.

The MMGPI shows the relative position of each country’s old age dependency ratio in respect to five key factors:

• The labor force participation of older workers ages 55 to 64;
• The labor force participation of older workers ages 65 and older;
• The increase in the labor force participation rate of 55- to 64-year-olds from 2000 to 2015, which determines whether the country is actually experiencing more people working at older ages;
• The projected increase in the retirement period from 2015 to 2035 allowing for the expected increases in life expectancy and the projected increase in the normal eligibility age for Social Security or the publicly funded pension; and
• The level of pension fund assets expressed as a percentage of gross domestic product (GDP) in each country.

Knox says although these indicators are not foolproof, they are indicative of developments which impact sustainability and community confidence in the provision of future retirement benefits.

Life expectancies at birth have increased by seven to 14 years in most countries during the last 40 years, equating to an average of one additional year for every four years—a significant result that cannot be ignored in the ongoing reform of the pension system, the report says. Even more significantly, the increased life expectancy of a 65-year-old over the last 40 years ranges from 1.7 years in Indonesia to 8.1 years in Singapore.

“Whatever actual figure emerges in the next 40 years, there is little doubt that people are living longer in their older years,” says Knox. “Without changes to retirement ages and ages for eligibility to access Social Security and private pensions, there will be increasing pressure on global retirement systems to the detriment of the financial security provided to older members of our society.”

The increasing life expectancy in the US, with a birth rate below what is needed to maintain the population, means that the country’s old age dependency ratio is increasing. This is problematic for the country’s pay-as-you-go Social Security system, and adjustments to that system will eventually be necessitated.

According to Professor Rodney Maddock, of the Australian Centre for Financial Studies, “We are living longer, living larger portions our lives in retirement and spending more in retirement, so we need to be well-placed to ensure fulfilling, adequately-funded retirements.”

The MMGPI acknowledges that there are areas for improvement in all countries’ retirement income systems. Possible measures to further enhance the United States’ system include:

• Raising the minimum pension for low-income pensioners;
• Adjusting the level of mandatory contributions to increase the net replacement for median-income earners;
• 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 the access to funds before retirement;
• Introducing a requirement that part of the retirement benefit must be taken as an income stream;
• Increasing the funding level of the Social Security program;
• Raising the state pension age and the minimum access age to receive benefits from private pension plans;
• Providing incentives to delay retirement and increase labor force participation at older ages; and
• Providing access to retirement plans on an institutional group basis for workers who don’t have access to an employer sponsored plan.

More information about the Index is here.