👴 The US retirement system

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The U.S. Retirement System: A Global Comparison and Challenges

The U.S. retirement system, although widely used, doesn't rank highly when compared to other nations, receiving a C+ grade and ranking No. 29 out of 48 countries in the 2024 Mercer CFA Institute Global Pension Index.

This ranking considers both public and private retirement funds, including Social Security and 401(k) plans.

In contrast, the U.S. ranked No. 22 out of 44 nations in a similar index by Natixis Investment Management, reflecting a decline from its No. 18 position a decade ago.

So, how does it compare to others out there and what is it missing? Let’s discuss.

Top Global Retirement Systems

Countries like the Netherlands, Iceland, Denmark, and Israel received top marks, with A grades for their retirement systems.

Other nations such as Singapore, Australia, Finland, and Norway received B+ grades, while several others, including Portugal, Canada, and the U.K., earned a B rating.

These high-ranking countries often feature extensive public retirement programs and policies designed to secure financial stability for their elderly populations. But, most people agree that even these retirement systems are not always perfect and improvements can be made.

The U.S. System: A Three-Legged Stool

The U.S. retirement system is often referred to as a "three-legged stool," consisting of Social Security, employer-sponsored retirement plans (like 401(k)s), and individual savings.

However, the U.S. has significant challenges, particularly the gap in access to workplace retirement plans.

While 68% of private-sector workers had access to retirement plans in 2024, only about 53% participated. In comparison, nations like the Netherlands provide widespread access, with nearly all workers covered by retirement plans.

Another significant issue is "leakage"—the premature withdrawal of retirement savings.

In the U.S., workers can withdraw their 401(k) savings when changing jobs, with about 40% of workers cashing out their balances prematurely. This flexibility, while helpful in emergencies, results in diminished long-term savings for many Americans.

Social Security’s Role and Limitations

Social Security plays a critical role in retirement income for most Americans, particularly those over 65.

Approximately 90% of people in this age group rely on Social Security benefits, which are based on a worker’s highest 35 years of earnings. These households rely heavily on Social Security benefits, with at least 50% of their family income coming from these payments. Additionally, approximately 25% of older households depend on Social Security for at least 90% of their family income.

While benefits are progressive, meaning lower earners receive a higher replacement rate, the minimum benefit is lower than in many other countries with public pension systems, such as those in Scandinavia.

Addressing Retirement Gaps

Efforts are underway to address some of the U.S. system’s shortcomings. Many states are making changes too. For exampke, nine states have enacted auto IRAs, and two cities, New York City and Seattle. Illinois, California, Oregon, Colorado, Connecticut, Maine, Maryland, Virginia, and New Jersey offer auto IRAs.

These automatically enroll workers in state-sponsored retirement plans if their employers don't offer one. Additionally, the Secure 2.0 Act, passed in 2023, expands eligibility for 401(k)s and raises the threshold for cashing out balances for departing workers. It allows companies to match student loan payments at the same rate as regular elective deferrals, depositing the matching contributions directly into the employee's retirement account.

Challenges to Building Retirement Savings

Building a solid retirement nest egg remains challenging for many Americans due to several factors. According to the 2022 Survey of Consumer Finances conducted by the U.S. Federal Reserve, the median retirement savings for all families is $87,000.

Investors under 35 have an average of $49,130 saved for retirement, while investors aged 35 to 44 have an average of $141,520 saved.

The lack of universal access to workplace retirement plans, combined with high rates of early withdrawals, makes it difficult for many to accumulate sufficient savings.

While Social Security serves as a critical safety net, its benefits alone are often insufficient for a comfortable retirement. Without more substantial public retirement programs and policies designed to prevent early withdrawals, many Americans may struggle to meet their retirement goals.

To improve the retirement outlook for U.S. workers, experts suggest increasing the minimum Social Security benefit and expanding workplace retirement plan coverage. These changes could help provide a more secure retirement future for a larger segment of the population.

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