US Gets C+ Grade for Pension System in Global Ranking

The U.S. retirement system was given a grade of C+ for the second year in a row in the 2024 Mercer CFA Institute Global Pension Index.

The lackluster grading based on three retirement metrics put the U.S. 29th on a global list of 46 countries. The Netherlands, Iceland and Denmark held the top three spots, respectively, for the second year running.

Mercer’s 16th annual survey benchmarked and compared the retirement systems with a secondary purpose of highlighting shortcomings in each system and suggesting areas of reform. Each country was scored according to three metrics:

• Adequacy (40% weight): system design, government support, home ownership, savings, growth assets and benefits;
• Sustainability (35% weight): government debt, public expenditure, demography, economic growth and pension coverage; and
• Integrity (25% weight): regulation, communication, protection, governance and operating costs.

The U.S. score of 60.4 came from an adequacy score of 63.9, a sustainability score of 58.4 and an integrity score of 57.5.

Room for Progress

Mercer provided suggestions for how the U.S. could improve its system, including a note on reducing pre-retirement leakage by “further limiting access to funds before retirement.” This would appear to run counter to some of the provisions in the SECURE ACT 2.0 of 2022, which allows for penalty-free hardship withdrawals of up to $1,000, along with larger emergency withdrawals for domestic abuse and disaster recovery.

Katie Hockenmaier, a partner in and U.S. defined contribution research director at Mercer, says that while these new allowances may create some leakage, the overall goal is to provide “more flexibility” for employees to manage short term financial needs.

“The hope is that employees will continue to contribute to their retirement programs over their career, possibly in higher amounts, rather than opt not to participate at all or defer lower amounts because they feel they don’t have the flexibility they need,” she wrote via email.

Hockenmaier says Mercer advises plan sponsors to take a close look at their respective participant pools to make decisions that will prevent plan leakage, in addition to recommending other programs and solutions separate from the plan such as “offering budgeting tools, financial coaching, employee assistance programs, etc.”

Mercer also suggested that the U.S. bolster its retirement system by requiring that part of private retirement benefits be taken as an income stream. Hockenmaier notes that the U.S., unlike some other global retirement systems, does not require annuitization of savings in DC plans.

Although Mercer does not see any “statutory requirement” in the near future, it advocates for employer-sponsored plans to provide participants with the ability to convert savings into a stream of income “through things like systematic withdrawals (non-annuitized) or annuities.”

“Some of the most recent legislative developments, such as [the Setting Every Community Up for Retirement Enhancement Act of 2019] safe harbor for annuity selection has already resulted in an uptick of adoption of retirement plan solutions that will provide for consistent income streams,” Hockenmaier says. “We anticipate that there will be continued adoption of non-annuity-backed and annuitized income stream features tied to DC plans.”

Global View

According to the report, increasing longevity, higher interest rates and the rising costs of care are putting pressure on governments across the world to support pension systems. As a result, several countries have slightly lower scores than in previous years.

“In a world where fertility rates are falling and life expectancy is rising, retirement income systems are center stage,” said Pat Tomlinson, president and CEO of Mercer, in a statement. “Ensuring strong alignment in private and public retirement income arrangements, increasing employee coverage and encouraging higher labor force participation for those who wish to work at older ages are just a few ways to improve long-term outcomes for retirees.”

The rankings were based on total index value. Grade A systems had an index value of greater than 80, B+ systems had an index value ranging from 75 through 80, B systems from 65 through 75, C+ systems from 60 through 65, C systems from 50 through 60 and D systems from 35 through 50. E systems were those with an index value less than 35, although no countries scored so low.

Of the countries considered, only the Netherlands, Iceland, Denmark and Israel had a grade of A, which Mercer and the CFA Institute described as first-class and robust retirement systems that deliver good benefits, are sustainable and have a high level of integrity.

South Africa (49.6), Turkey (48.3), Argentina (45.5), the Philippines (45.8) and India (44) received D grades as countries with systems that have some desirable features, but also major weaknesses and omissions that need to be addressed.

The global pension landscape is changing, as more and more countries and plans shift to defined contribution plans from defined benefit plans, noted Margaret Franklin, president and CEO of the CFA Institute, in the report.

“The ongoing shift to defined contribution pension plans introduces many financial planning challenges, which are falling squarely on the shoulders of tomorrow’s retirees,” Franklin wrote in the report. “DC plans require individuals to make complex financial planning decisions that may significantly impact their financial circumstances, and yet many individuals are not well prepared to manage the required decisions. The Index serves as an important reminder of the gaps that remain in providing long-term financial security and advice for individuals.”

Franklin wrote that pension funds must evolve to provide a range of options and support to help individuals achieve the best possible retirement outcomes.