In its study, Mercer and ACFS measured the overall pension benefits that are being provided to the citizens of 16 countries, the likelihood that those systems will be able to provide benefits in the future, and the integrity of private retirement plans. (In previous years, the report assessed 14 countries.)
And, same as last year, the U.S. didn’t get such high marks. In fact, the U.S. earned a “C” grade for its pension-plan system according to the 2011 Melbourne Mercer Global Pension Index, the same grade awarded to Poland and Brazil. Read the Global Pension report here.
The Netherlands and Australia earned the highest grades, a B+, for their respective retirement-income systems. Read my column from last year on the Melbourne Mercer index.
By its own admission, Mercer and ACFS said comparing diverse retirement-income systems around the world is not easy.
“Retirement-income systems are diverse and often a number of different programs,” according to a report published by the Organization for Economic Cooperation and Development in March 2011. “Classifying pension systems and different retirement-income schemes is consequentially difficult.” Read the OECD’s report, “Pensions at a Glance 2011,” here.
At the moment, no country has a gold-standard pension system according to the Melbourne Mercer index. To receive a best-in-class grade, the researchers said a system would have to provide adequate retirement benefits, be sustainable over the longer term and be trusted due to its strong and robust governing structures.
Critics of the study
For his part, Nevin Adams, the director of education and external relations at the Employee Benefit Research Institute and the co-director of EBRI’s Center for Research on Retirement Income, suggested that Americans should view the rankings with a large grain of salt.
“I wouldn't put too much stock in the rankings, though I think it's an interesting exercise,” Adams said. “Pension system evaluation is something of a moving target these days.”
Adams said that many of the retirement-income systems examined in the Melbourne Mercer index are “themselves undergoing significant restructuring, and that the evaluations, at least in some cases, seem to reflect a version of the system which isn't likely to be in place in five years, and which, in many cases, will, I think, be less ‘generous.’”
Five ways to fix the U.S. system
The researchers who created the Melbourne Mercer index said that Uncle Sam could raise its overall grade by 1) raising the minimum pension for low-income pensioners; 2) adjusting the level of mandatory contributions to increase the net replacement ratio for median-income earners; 3) improving the vesting benefits for all plan members and maintaining the real value of retained benefits through to retirement; 4) reducing pre-retirement leakage by further limiting the access to funds before retirement; and 5) introducing a requirement that part of the retirement benefit must be taken as an income stream.
Retirement-income experts said the researcher’s recommendations are not new ideas, but they did agree, in the main, that acting on those suggestions would improve the overall U.S. retirement system.
“The recommendations for the U.S. are not surprising, or striking,” Adams said. “You could sum it up by saying, ‘make people contribute more, make them wait longer to get their benefits, pay them (particularly lower income workers) more benefits, increase vesting so that they earn more benefits faster, and limit their ability to tap into those retirement benefits before retirement.’ Essentially, make people put in more so that they can get more later.”
Mandatory contributions and guaranteed income
For his part, Phil Waldeck, a senior vice president at Prudential Retirement, said there are several ways to improve the adequacy of pension benefits and place more Americans on the road to a secure retirement.
The first one, he said in an email, is increasing the level of mandatory contributions, which many employers are addressing today through mandatory enrollment.
Another would be to require that a portion of a retiree's benefit be taken as a guaranteed income stream.
“With the shift from defined-benefit to defined-contribution plans, this has long been a concern,” Waldeck said. “This issue is being addressed through the addition of investment and payout options within defined-contribution plans designed to provide lifetime income to retirees, but it will likely not come as a mandate in this country.”
Some have noted that the recent request for comment from the Securities and Exchange Commission and Department of Labor about mandatory annuities received a strong negative response. Our guaranteed income stream is Social Security, which most lower income earners are going to be reliant on for most of their replacement income.
Waldeck agreed with the Melbourne Mercer index researchers that there should be “further limitations on access to retirement plan funds in the pre-retirement period.”
That might mean, for instance, making it harder for participants to take loans from their retirement plan.
Said Waldeck: “All of these measures can lead to a better outcome for retirees and help to ensure their retirement security.”
Three issues to face
Josh Cohen, the defined-contribution practice leader at Russell Investments, said most Americans, going forward, are going to rely on workplace savings and Social Security for their retirement-income needs.
From his perspective, there are three major issues the U.S. needs to contend with, two of which are significant public policy challenges.
The first is the sustainability of the Social Security system, and only political will can resolve that, Cohen said. The second is the very real problem of workplace coverage.
“Millions of Americans have no access to workplace savings — primarily seasonable employees, part-time employees, small-business employees and the self-employed,” Cohen said. “There is no easy answer to this given we have a voluntary system in the U.S.”
The third issue, as noted by the Melbourne Mercer index researchers, is the ability for defined-contribution plans to provide sufficient income adequacy. “The good news there is that while the results have been mixed so far, we have a good idea about what to do to make these plans more effective going forward,” Cohen said. “We know that defined-contribution plan participants can accumulate significant savings and that adding certain plan features can help facilitate success.”
Specifically, he said automatic enrollment can boost participation in plans when available, automatic escalation can increase savings rates to more appropriate levels, and defaulting participant assets into target-date funds can help participants invest at a more age appropriate risk levels.
Still, there are two areas that need work. One, as the Melbourne Mercer index researchers said, is to prevent leakage, particularly at the point of a job change, and two, to help participants manage the unique risks in the spend-down phase of retirement.
Fiscal realities
Cohen also said some of the proposals coming out of the various commissions to deal with our fiscal deficit are another threat to the current defined-contribution system.
Most of those proposals “look to reduce the level of tax incentives related to defined-contribution plan contributions,” Cohen said. “This can tremendously undermine the current system, discourage savings and dissuade some companies from even offering a plan. So, while the government is looking to solve one problem related to our deficits, they could be exacerbating our retirement-security problem.”
Others, meanwhile, suggest that the U.S. might not be able to improve its retirement-income system given the fiscal realities not only of the government but Americans in general.
“We don't — and shouldn't — live our lives as though the only thing going on is saving for retirement,” Adams said.
“Higher contributions to retirement funds now, whether by employers or employees, will surely diminish the funds available for other here-and-now necessities,” he said. “Not allowing people to tap into their 401(k) in times of financial hardship will, one, surely create additional hardship, and, two, diminish people's willingness to save voluntarily at the levels we know they should.”
Source: http://www.marketwatch.com/story/5-ways-the-us-can-improve-its-retirement-system-2011-11-03?reflink=MW_news_stmp
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