Mercer Report: Sustainability of US Retirement System Under Pressure

(October 11, 2011) — The pension system in the United States has ranked in tenth place in Mercer’s global index, but reform is needed, the consulting firm has revealed.

Mercer’s global comparison of pension systems has demonstrated that while Netherlands, Australia, and Switzerland hold the top three spots in the ranking, the US’ retirement income has held onto its tenth-place ranking. However, the sustainability of the US retirement system is at risk due to a drop in asset values and a rise in government debt. According to the 2011 Melbourne Mercer Global Pension Index, the US system requires further reform to withstand the pressures of its aging population.

The following list summarizes Mercer’s results in order of strongest to weakest pension systems: 1) Netherlands, 2) Australia, 3) Switzerland, 4) Sweden, 5) Canada, 6) UK, 7) Chile, 8) Poland, 9) Brazil, 10) United States, 11) Singapore, 12) France, 13) Germany, 14) Japan, 15) India, and 16) China.

The report stated: “The provision of financial security in retirement is critical for both individuals and societies as most countries grapple with the social and economic effects of aging populations. There is no perfect system that can be applied universally around the world. Indeed, even comparing the diversity of retirement income systems is certain to be controversial as every system is different and has arisen from each country’s particular economic, social, cultural, political and historical circumstances. However there are certain features and characteristics of retirement systems that are likely to lead to improved benefits, an increased likelihood of future sustainability of the system, and a greater level of confidence and trust within the community.”

“The best pension systems adopt a multi-pillar approach to spread these long term risks between governments, employers and individuals. Such an approach is also particularly relevant in periods of economic uncertainty, as we are now facing,” said Mercer Senior Partner and author of the report, Dr. David Knox, adding that in uncertain economic times, the risk of governments not being able to financially support their aging population is becoming more of a reality unless some significant and immediate pension reform is made.

As outlined in a release on the study by Mercer, the overall index value for the US system could be increased by:

1. Raising the minimum pension for low-income pensioners;

2. Adjusting the level of mandatory contributions to increase the net replacements for median-income earners;

3. Improving the vesting of benefits for all plan members and maintain 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.

“Much needs to be done to help Americans secure sufficient retirement savings,” said Arthur Noonan, senior consultant in Mercer’s Retirement, Risk and Finance Group. “Among the challenges that the US retirement system faces is the decline in the percentage of employees covered by a Defined Benefit (DB) plan. The funding deficit of such plans, which at the end of September reached a post-World War II high among S&P 1500 companies, may force additional plans to be frozen or closed if market conditions do not improve.”

The Melbourne Mercer Global Pension Index assessed the retirement income systems in 16 countries spread across the Americas, Europe, and Asia Pacific.