We're No. 6! OK, so it's not really something worth boasting about, but at least the U.S. can claim its retirement-income system is better than at least five others, according to a first-of-its-kind study ranking the retirement-income systems of 11 countries.
The Melbourne Mercer Global Pension Index ranked countries based on the adequacy, sustainability and integrity of their public and private pension systems. The Netherlands topped the rankings, followed by Australia, Sweden, Canada, the United Kingdom and the United States. Chile came in at No. 7, followed by Singapore, Germany, China and Japan.
Adequacy refers to whether projected retirement benefits will provide a reasonable standard of living in old age, said Charles Salmans, a spokesman at Mercer. Sustainability regards whether a country's pension programs will pay benefits in decades to come as current workers retire and life expectancy improves. (See the Mercer news release.)
In measuring sustainability, Mercer evaluated such factors as the demographics of the population (the ratio of productive workers to retirees), the funding status of pension plans relative to pension liabilities and the level of government debt. And integrity speaks to matters of governance -- whether systems of prudent regulation, risk protection and oversight are in place.
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None is perfect
Not one of the 11 countries studied scored an A for its retirement-income system. No country has a "first-class and robust retirement-income system that delivers good benefits, is sustainable and has a level of integrity," according to Mercer. But the index did confirm what experts have long thought to be true: The Netherlands and Australia have the top two retirement-income systems in the world, a fact noted in a previous column.Of note, Sweden and Canada have the third- and fourth-best systems in the world, according to the study. As for the U.S., Mercer gives it high marks for the sustainability of its pension plans but low marks for the adequacy of retirement income.
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"The largest single element of a shortfall for the U.S. is in the adequacy of projected retirement income for our retirees, particularly at the lower income levels," Salmans said via e-mail. "U.S. companies are freezing or closing their defined-benefit plans and cutting or eliminating their 401(k) matches."
What's more, Americans aren't saving enough for retirement, and a large percentage won't have enough assets and income to maintain their lifestyle in retirement. The average American household will have only 63% of the income needed in retirement, according to a new report from consulting firm McKinsey, which took into account Social Security, defined-benefit plans, defined-contribution plans and personal savings.
"The funding of defined-benefit plans in the U.S. remains a challenge," wrote Arthur Noonan, a senior consultant and actuary at Mercer. "We anticipate that many plan sponsors will face substantial increases in their required cash contributions in 2010. Funding issues also affect public-sector pension plans, and, longer term, the funding of Social Security is an issue.
"Clearly, U.S. policymakers and the private sector are grappling with the challenge of balancing the adequacy of benefits with the sustainability of public and private pension plans, a matter of special concern during a difficult global financial and economic environment," Noonan added. "Thus, even though the sustainability of U.S. pension plans is greater than in countries with a more rapidly aging population or more generous benefits, the funded status of U.S. defined-benefit plans remains a concern. Expense and cash funding of defined-benefit plans is likely to continue at historically high levels."
Moreover, Noonan said, the U.S. is challenged to improve the adequacy of pensions as its work force reaches retirement age and as the tough economic climate causes companies to reduce or suspend 401k matching contributions and freeze or close defined-benefit plans.
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