This is why the US retirement system is not among the best in the world

The US retirement system does not receive higher marks than other countries.

In fact, the US got a C+ grade and ranked No. It analyzed public and private sources of retirement funds, such as Social Security and 401(k) plans.

The same index compiled by Natixis Investment Management places the US at No. 22 out of 44 nations this year. Its ranking has dropped from a decade ago, when it ranked No. 18.

“I think [a C+ grade] it could describe a situation where there is a lot of room for improvement,” said Christine Mahoney, global pensions leader at Mercer, a consulting firm.

The Netherlands ranked No. 1, followed by Iceland, Denmark and Israel, respectively, which all received “A” grades, according to Mercer. Singapore, Australia, Finland and Norway received B+.

Fourteen countries – Chile, Sweden, United Kingdom, Switzerland, Uruguay, New Zealand, Belgium, Mexico, Canada, Ireland, France, Germany, Croatia and Portugal – received a B grade.

Of course, retirement systems differ because they deal with a nation’s unique economic, social and cultural practices, politics and history, according to the Mercer report. However, there are certain characteristics that can generally determine how well older citizens live financially, the report found.

The US system is often referred to as a three-legged stool, consisting of Social Security, retirement plans and individual savings.

The lack of US position in the world is mainly due to the large gap in the share of people who have access to a retirement plan at work, and for the many opportunities for “leakage” of money from the accounts before retiring, Mahoney said.

Employers are not required to provide a retirement plan such as a pension or 401(k) plan to employees. About 72% of private sector workers received one by March 2024, and about half (53%) participated, according to the US Bureau of Labor Statistics.

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“People who have [a plan]”It’s probably pretty average, but you’ve got a lot of empty-nesters,” Mahoney said.

In contrast, other top-ranking countries such as the Netherlands “cover all workers in the country,” said Graham Pearce, Mercer’s global benefits division leader.

In addition, high-income countries often have greater restrictions than the US on how much money citizens can withdraw before retirement, Pearce explained.

American workers can withdraw their 401(k) funds when they change jobs, for example.

About 40 percent of workers retire “prematurely” each year, according to the Employee Benefit Research Institute. A separate study from 2022 surveyed more than 160,000 US workers who retired from 2014 to 2016, and found that nearly 41% withdrew at least some of their 401(k). – and 85% complete.

Employers are also legally allowed to make small 401(k) contributions and send employees a check.

Although the US can provide more flexibility to people who need to use their money in emergencies, for example, this so-called leakage also reduces the amount of money they have saved for old age, experts said.

David Blanchett, head of retirement research at PGIM, the investment management arm of Prudential, said: “If you’re a commuter, with low savings and leakage rates, it makes be hard to build your own retirement nest egg.

Social Security is considered a major source of income for many older Americans, providing the bulk of their retirement income for a large portion of the population over age 65.

Until then, about nine in 10 people age 65 and older were receiving Social Security benefits as of June 30, according to the Social Security Administration.

Social Security benefits are often tied to workers’ earnings and work history, Blanchett said. For example, the amount is related to 35 years of the highest salary of the worker.

Although benefits are progressive, meaning that low-income earners typically take a larger share of their pre-retirement income than high-income earners, Social Security’s minimum benefit is smaller than most states. others, like those in Scandinavia, through public pension programs, Blanchett said.

“It’s a weak safety net,” he said.

“There’s something to be said for the fact that, like public pension benefits, increasing minimum benefits for all retirees can strengthen retirement for all Americans,” Blanchett said.

That said, policymakers are trying to address some of these issues.

For example, 17 states have created so-called auto-IRA programs in an effort to close the security gap, according to Georgetown University’s Center for Retirement Initiatives.

These programs generally require employers who do not offer a retirement plan to enroll employees in the state plan and contribute to reduced wages.

The latest federal law known as Secure 2.0 has also expanded the features of the retirement system. For example, it made it possible for part-time workers to contribute to a 401(k) and raised the dollar limit for employers to provide benefits for departing workers.