The U.S. retirement system is facing considerable scrutiny as it falls short compared to its international counterparts. With a disappointing C+ grade and a rank of 29 out of 48 in the Mercer CFA Institute Global Pension Index for 2024, it is evident that the governance of retirement resources in the United States requires significant reform. This report, which incorporates both public and private retirement avenues, exposes glaring weaknesses in how Americans plan for their financial future post-retirement. Moreover, a parallel assessment by Natixis Investment Management further confirms a downward trend over the past decade, highlighting that the country has slipped from 18th place to a concerning 22nd.
A critical look at the structural components of U.S. retirement planning reveals a fundamental flaw in its “three-legged stool” model. This metaphorical stool comprises Social Security, workplace retirement plans, and individual savings. However, a substantial number of Americans are lacking a chair leg, having limited or no access to viable workplace retirement options. Christine Mahoney of Mercer succinctly notes that the U.S. system exhibits ample room for improvement. With only 72% of private-sector workers having access to a retirement plan, and even fewer—53%—actively participating, the core problem becomes painfully clear: too many employees are left in the lurch without adequate planning tools.
The accessibility and participation rates in workplace pension plans starkly contrast with the high-ranking countries, which boast nearly universal coverage. For example, the Netherlands, which ranks first globally, ensures coverage for virtually all workers. Furthermore, top-rated pension systems maintain stricter controls over the premature withdrawal of retirement savings. In the U.S., on the other hand, flexibility comes at a cost. Approximately 40% of workers cash out their 401(k) funds when they change jobs. This “leakage,” as it is termed in retirement jargon, disrupts long-term savings goals, further eroding the financial foundation necessary for a stable retirement.
Although Social Security serves as a primary source of income for many older Americans, its insufficiency relative to other developed nations cannot be ignored. It is disheartening to realize that while 90% of those aged 65 and older receive Social Security benefits, these payments are insufficient when compared to the more robust public retirement systems in Scandinavian countries. David Blanchett, leading retirement researcher at PGIM, emphasizes that the U.S. safety net has considerable gaps. The progressive design of Social Security might favor low-income earners, but the minimum benefits simply do not stack up against what other nations provide. A suggested increase in the minimum benefit for all retirees could strengthen the resiliency of U.S. pensions.
As awareness of the glaring deficiencies within the U.S. retirement system has grown, steps toward reform are being taken. States have recognized the urgent necessity to address the coverage gap, and 17 states have implemented auto-IRA programs designed to enroll workers automatically if their employers do not provide retirement options. This initiative aims to broaden participation and close the gap in accessibility. Moreover, the recent Secure 2.0 federal law represents a significant move toward enhancing retirement flexibility by making more part-time workers eligible for 401(k) plans and raising thresholds for cash-out options, thereby encouraging more individuals to participate in saving for retirement.
The U.S. retirement system finds itself underwhelming and in desperate need of overhaul. While other nations have embraced structures that ensure a financially secure old age for their populations, America lags behind due to deficiencies in access, participation, and the adequacy of its safety nets. Continuous variable reforms need to be evaluated and implemented to enable a more sustainable financial future for Americans in retirement. The landscape of personal finance for retiring citizens must evolve, ensuring it can meet the growing demands of an aging population that deserves more than a lukewarm grade in retirement planning.