US Retirement System Matches Worldwide Average With C+ Grade

The U.S. retirement system’s overall index value, measuring the quality of a country’s retirement plan system, came in at about average when ranked against other countries around the globe, according to the Mercer CFA Institute Global Pension Index 2023.

When ranking across three overarching categories for retirement savings success among countries, the U.S. scored 63, or a C+, on a scale of 0 to 100, almost matching the worldwide average value of 62.9, according to the annual study. In 2022 the U.S. ranked 20th out of 44 countries, while this year it ranked 22^nd out of 47 countries.

The overall index value is based on three weighted sub-indices—adequacy (40%), sustainability (35%) and integrity (25%)—to measure each retirement income system. Adequacy looked at areas such as benefits, system design, savings and government support. Sustainability examined pension coverage, total assets, demography and other areas. Integrity encompassed regulation, governance and protection.

The U.S. system scored 66.7 on adequacy, 61.1 on sustainability and 59.5 on integrity. The worldwide average scores were 64.8 on adequacy, 54.2 on sustainability and 71.9 on integrity.

The U.S. retirement income system comprises a Social Security system with a progressive benefit formula based on lifetime earnings, adjusted to a current dollar basis, together with a means-tested top-up benefit and voluntary private pensions, which may be occupational or personal. Mercer reported that overall index value for the U.S. system could be increased by raising the minimum pension for low-income pensioners, improving the vesting of benefits and reducing pre-retirement leakage.

Other systems with comparable overall index values to the U.S. included Colombia (61.9), the United Arab Emirates (62.5) and Hong Kong (64.0). Meanwhile, systems scoring the highest were the Netherlands (85), Iceland (83.5), Denmark (81.3) and Israel (80.8), each receiving an ‘A’ grade.

The Netherlands’ system received the highest index value in 2023, as the system provided quality benefits, supported by a strong base of savings from the population and sound regulation, according to Mercer. The firm stated that the Netherlands will continue to be a successful system despite the country currently undertaking significant pension reform, moving from a mostly collective benefit structure to a more individual, defined contribution approach.

“Any comparative ranking of systems is likely to be controversial as each system has evolved from particular economic, social, cultural, political and historical circumstances,” the researchers noted. “This means there is no single system that can be transplanted from one country and applied, without change, to another. However, certain features and characteristics are likely to lead to improved financial benefits for the older members of society, an increased likelihood of future sustainability of the system, and a greater level of community trust and confidence.”

Mercer and the CFA Institute recommended reforms to improve the long-term outcomes of retirement income systems, including:

• Increasing coverage of employees, including non-standard workers, and the self-employed in the private pension system. This includes recognizing that many individuals will not save for the future without an element of compulsion or automatic enrollment;
• Increasing the state pension age and/or retirement age to reflect increasing health-adjusted life expectancy, both now and into the future, thereby reducing the costs of publicly financed pension benefits;
• Promoting higher labor force participation at older ages, which will increase the savings available for retirement and limit the continuing increase in the length of retirement;
• Encouraging higher levels of private saving, both within and beyond the pension system, to reduce future dependence on the public pension while also adjusting the expectations of many workers;
• Introducing measures to reduce the gender pension gap and gaps that exist for minority groups;
• Reducing leakage from the retirement savings system prior to retirement, thereby ensuring that the funds saved, often with associated taxation support, are used for the provision of retirement income; and
• Improving the governance of private pension plans and introducing greater transparency to improve the confidence of plan members.

The 15th annual Mercer CFA Institute Global Pension Index was released by Mercer and CFA Institute. The report compared 47 retirement income systems, covering 64% of the world’s population.