America’s pension system slipped two places and has fallen
to 13th in the world in the Melbourne Mercer Global Pension Index (MMGPI). However,
Emily Eaton, a senior consultant in Mercer’s International Consulting Group, in
New York City, tells PLANSPONSOR the U.S. fell, in part, because five countries
were added to the index this year, and two of those ranked above the U.S. However, the U.S. ranking does warrant some
consideration. According to the MMGPI report, the overall index value for the
American system could be increased by:
- raising the minimum pension for low-income
- adjusting the level of mandatory contributions
to increase the net replacement for median-income earners;
- improving the vesting of benefits for all plan
members and maintaining the real value of retained benefits through to
- reducing pre-retirement leakage by further
limiting the access to funds before retirement; and
- introducing a requirement that part of the
retirement benefit must be taken as an income stream.
Eaton says the first two are referring to America’s Social
Security system. As for the third
recommendation, Eaton says she looks at it like the two sides of a coin. She
explains that the younger generation, who are mostly covered by defined
contribution (DC) retirement plans, are more likely to move around; they could
have four or more different employers by age 30, for example. If DC plan
vesting schedules take three or six years for a participant to fully vest, this
seems like it’s not a very long time, she notes, but it could be detrimental to
younger participants. However, Eaton points out that whatever younger
participants do get to keep will increase in value over time with investment
On the flip side, participants who have worked for years and
are vested, and may even have a DB benefit, see the value of their retirement
accounts go down over time as benefits may be frozen at a certain amount. They
are invested conservatively and they are drawing down their accounts.
As for introducing a requirement that part of the retirement
benefit must be taken as an income stream, Eaton notes that if you look at all
countries in the report, there are only six that have either no requirement for
taking benefits in an income stream or no tax incentive for doing so.
According to Eaton, regulatory changes could include
increasing the tax disincentive for taking distributions of retirement assets
instead of rolling them over, or even forbidding the withdrawal of assets at
the time of a job change.
Other regulatory changes that could be made to improve the
U.S. retirement system are mandatory automatic enrollment, increasing mandatory
contributions, and anything the government can do to encourage participation
and encourage participants to keep their money in the system.
She mentions that other countries’ scores in the MMGPI have
increased due to proactive measures taken in those countries. For example,
other countries have increased the retirement age at which individuals can get
government benefits to keep up with changing life expectancy.
Denmark ranked No. 1 in the index. According to Eaton, some
reasons include: it has a mandatory occupational scheme on top of the
government system, there’s a small gap between life expectancy and the
retirement age, the mandatory schemes are fully funded, and there are measures
in place for employees approaching retirement to be able to continue working
while accessing some retirement benefits.
It is clear that retirement security for Americans is an
issue, and the survey has a lot of focus on what is mandated in each country,
but even if the U.S. government is not proactive to address the issue, plan
sponsors can be.
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