Getting a C+ rating under any circumstances is depressing. The same goes for the American retirement system.
The U.S. retirement income system earned its disappointing rating, according to its 15th annual report. Mercer CFA Institute Global Pension Index (MCGPI) The index released on Tuesday placed it 22nd out of 47 countries, with its index value dropping from 63.9 in 2022 to 63.0 in 2023.
This moderate ranking primarily reflects growing concerns about the future of Social Security in the United States and the flaws in employer-sponsored retirement plans.
Katie Hockenmeyer, a partner at Mercer, told Yahoo Finance that “retirement savings security and a structured, high-quality retirement plan remain out of reach for many Americans and need to be addressed.” “This creates a huge adequacy gap.” “Individuals will have an increasingly important role to play in relation to their own retirement.”
Still, as the global aging population grows, retirement preparedness becomes more important, but overall indicators highlight that no system is perfect.
“It’s important that all workers start thinking about their retirement plans now,” lead author David Knox, senior partner at Mercer, tells Yahoo Finance. “With an aging population and rising interest rates on government debt, it is inevitable that individuals will need to be more independent in the future.”
How to decide the ranking
The index examined both government and private retirement income sources and used a weighted average of sub-indices that measure three broad characteristics: adequacy, sustainability, and completeness.
These categories, in summary, seek to ascertain what benefits future retirees are likely to receive. Whether existing systems can continue to deliver despite demographic and fiscal challenges and whether private pension systems foster long-term community confidence. The study also looked at home ownership and household debt levels.
Read more: How to find out your Social Security COLA increase in 2024
The index takes into account a wide range of factors, including whether there is a minimum age for receiving benefits from private pension schemes. Consider whether there are any requirements or incentives to receive retirement benefits as an annuity or lifetime income stream. It will also score you on how unpaid pension benefits will be taken into account when dividing assets in the event of divorce or separation. Another important factor: If the worker is on disability or paid parental leave, will there be severance benefits?
Access is key for Americans
The biggest hurdles that have prevented America from reaching the A rating revolve around Social Security, 401(k) savings, and individual retirement accounts, the largest source of retirement income for Americans.
First, Social Security reserves are projected to run out in 2033, at which point the program will only be able to pay out 77% of benefits to seniors. This affects many workers, especially low-income workers, who plan to rely on Social Security for a large portion of their retirement income.
Second, gig workers are left out of their employer plans, with half of U.S. workers, or about 57 million people, without access to employer-sponsored plans such as 401(k) plans. Although in some states I’m starting to work on this issue.
“Unfortunately, workers often do not take action if they do not have access to plans provided by their employers,” said Angela M. Antonelli, the association’s executive director. Retirement Initiative Center Georgetown University, previously told Yahoo Finance. “Only 5% of workers take steps to open a retirement savings account if their employer does not offer one. When workers have access to an employer-provided plan, participation rates drop to 72%. %.”
automatic Registration 401(k) plans have helped improve participation rates and increase total retirement savings, but more employers need to do this. According to research, only one of his four employers currently offers automatic enrollment. Fidelity Investments Latest Report.
Another retirement problem in the US: Americans can also withdraw retirement savings Loans and cashouts can cause you to lose money early, which can jeopardize your future financial security. And a growing number of workers are plundering their retirement savings.
To improve the U.S. rankings, index creators will increase Social Security benefits for low-income retirees, improve vesting of benefits for all retirement plan participants, and increase pre-retirement funds. It proposes to further restrict access to reduce withdrawals and introduce requirements such as: Retirement benefits are recognized as a source of income.
There is room for improvement all over the world.
So if the US is in the middle, who is at the top when it comes to retirement? It’s the Netherlands. The retirement system received an A score and an overall index score of 85, which is very high. Second and third place went to Iceland (83.5 points) and Denmark (81.3 points). Argentina’s girlfriend had the lowest index value of 42.3.
One reason for the Netherlands’ high reputation is that all workers have both private and public pension accounts. The public pension system, which is currently under revision, will provide all retirees with a fixed amount depending on the length of time they lived and worked in the country. There is a requirement for employers to provide pensions to all workers. Additionally, workers can save with their own investments for retirement income.
But frankly, no system is perfect and all face challenges, the report’s authors note.
One of the major challenges is the aging of the global population.We are entering the era of The number of people over 65 will increase On top of that, inflation and rising interest rates are hitting pension systems around the world.
Margaret Franklin, president and chief executive officer of CFA Institute, said that in many countries, including the United States, the responsibility for retirement security falls more on individuals than ever before.
“We need to do more to put individuals in control of their financial futures,” Franklin told Yahoo Finance. “Gig economy workers and the self-employed are good examples of groups that would benefit greatly from increased communication and personalized pension products from governments and employers.”
Overall recommendations for improving retirement systems around the world, the report’s authors say, include expanding the coverage of many private pension plans and encouraging people to adopt retirement plans. It is included. please work a little moreKnox said it would increase the level of funds set aside for retirement and reduce leakage from the system before retirement.
Knox said artificial intelligence could also play a role in strengthening pension and social security systems in the future by helping investment managers make more efficient and better-informed decisions. He said that this could lead to improved investment returns for pension plan members.
“AI has the opportunity to improve standards of living in retirement, which is a worthy goal for all pension plans,” Knox said, while also acknowledging data privacy and cybersecurity concerns regarding AI.
Overall, this index provides a starting point for citizens and policy makers around the world to ensure a bright future for everyone in retirement.
Mr Franklin said: “Each year, this index reminds us that in many jurisdictions there is a long way to go to make pension systems work to their full potential and ensure the long-term financial security of beneficiaries. It plays an important role in making the world better.”
Kelly Hannon is a senior reporter and columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of her 14 books, including “The World’s Best.”Taking Control Even Over 50: How to Succeed in the New World of Work.” and “You’re never too old to get rich.” Follow her on Twitter @Kellyhannon.
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