Why U.S. Retirement Falls Short in the Developed World

Even though the U.S. retirement system may seem good, it is not as good as those in other developed countries. According to the Investment Company Institute, Americans saved more than $39 trillion for their old age in 2021.

In many global retirement rankings, like the Mercer CFA Institute Global Pension Index and Natixis Investment Managers 2021 Global Retirement Index, the U.S. does not even rank in the top 10. For example, the United States got a “C+” on Mercer’s index, and it was No. 17 on the list by Natixis.

The reason why the U.S. falls short is because of a design flaw. According to people who know about retirement, the U.S. has a “patchwork” design plan for retirement.

Iceland, on the other hand, topped both lists. The reports, which use different methods, say that, among other things, the country gives a lot of people generous and stable retirement benefits, has a low level of old-age poverty, and has a higher degree of retirement income equality.

High marks were also given to countries like Norway, the Netherlands, Switzerland, Denmark, Australia, Ireland, and New Zealand. For example, Mercer’s index says that Denmark, Iceland, and the Netherlands all got “A” grades.

Because the U.S. retirement system does not provide a chance for everyone to enjoy a financially secure retirement, the country falls behind most of these countries.

In an interview with Georgetown University’s Center for Retirement Initiatives, Angela Antonelli said even though we have $40 trillion invested, our retirement system is very uneven, piecemeal, and patchwork. Some people do very well, but many others fall behind. Consider this fact: According to the Organization for Economic Co-operation and Development, only three of the 38 developed countries in the group have more unequal incomes for older people than the U.S. The poverty rate for Americans aged 75 and up is “very high”: 28% in the U.S. and 11% on average in the OECD.

Many Americans don’t have retirement plans through their jobs. People often say that the U.S. retirement system is like a “three-legged stool” because it comprises Social Security, workplace plans like pensions and 401(k)s, and personal savings.

Retirement experts say that the lack of access to workplace savings plans is one of the main problems with the structure. Approximately 53% of U.S. workers had access to an employer-sponsored retirement plan in 2018, according to John Sabelhaus, a senior fellow at the Brookings Institution and adjunct professor at the University of Michigan. That’s better than the nearly 49% a decade ago.

A study by the Center for Retirement Initiatives found that about 57 million Americans fell into the “gap” in retirement savings coverage in 2020, which means they didn’t have access to a workplace plan.

In the U.S., people can save money for retirement on their own. The government doesn’t force people to save money or businesses to offer pensions or 401(k) plans (k). As companies have moved away from pension plans, people also have to take more responsibility for their retirement savings.

OECD data shows that 19 developed countries require some coverage by making businesses offer retirement plans, requiring people to have personal accounts, or requiring a mix of the two. In 12 countries, more than 75% of the people of working age are covered by the plans. In places like Denmark, Finland, and the Netherlands, the number is close to 90% or even higher.

In Iceland, where 83% of people are covered, the private-sector retirement system “covers all employees with a high contribution rate that leads to significant assets being set aside for the future,” Mercer wrote.

IRAs aren’t a catch-all for people who don’t have a 401(k) (k). People in the U.S. can save for retirement even if their employer doesn’t offer a plan. For example, they can open an individual retirement account. Antonelli said that doesn’t happen very often, though. The Investment Company Institute says that in 2020, only 13% of households will have put money into a pre-tax or Roth IRA.

In 2021, IRAs held almost twice as much money as 401(k) plans, which had $7.7 trillion. But most IRA funds don’t come from direct contributions; instead, they are rolled over from a workplace retirement plan. ICI data shows that $554 billion was rolled into IRAs in 2019, more than seven times the $76 billion put in directly.

People can’t save as much each year in an IRA as they can in a workplace plan. AARP says that Americans are 15 times more likely to save for retirement when they can do it at work through payroll deduction.