A ‘Passing’ Grade?

Let’s face it — nobody wants to be “average.”

And yet, there are now a handful of consultants that, each year, publish a ranking of how the world’s retirement systems rate—  and year after year the United States generally comes in about the middle of the pack.

The latest was one by Mercer that bestowed upon the United States a grade of…“C+”. It’s a passing grade, to be sure—  but one that stands in stark contrast to Denmark, Iceland & New Zealand, each of which rated an “A” — at least according to the ranking system applied by Mercer. Now, those all happen to be smaller in population, and more culturally and racially monolithic than the U.S. They all also have different approaches to taxes, and social infrastructure.

It’s easy, in view of those not insignificant differences to shrug off these findings — and over the years that has, in fact, been my inclination. At best, it’s no better than an “apples to oranges” comparison — at worst, it’s based on a weighting system and criteria that reflects a different world view predicated on conditions that simply aren’t realistic for a particular nation or its peoples.

And while the middle of the pack isn’t an awful place to be — well, who wants to be — or be considered — “average?” 

The Mercer report takes pains to outline both its methodology and scoring criteria[1]. As one might expect systems that have as their foundation comprehensive (and sustainable) government-based pensions seem to fare better in these rankings. Such things have a cost, of course — but if all you’re looking at is the outcome — well, you can be permitted certain allowances (and, in fairness, the sustainability of the program finances is a factor). 

Viking Crews

In fact, Iceland, in its first appearance in the 43-nation index rated an “A” and topped the list. What sets it apart? The authors cite (emphasis mine):

• a relatively generous state pension;
• a private pension system that covers all employees with a high contribution rate that leads to significant assets being set aside for the future; and
• a well-governed and regulated private pension system that has good design features.

Indeed, Iceland lands an A in each of the three major categories of adequacy, sustainability and integrity (the U.S.[2] spots a solid C+ in the first two, a C in integrity). The report contains a number of high-level reforms that the authors claim will “improve the long-term outcomes from retirement income systems. Among those are increasing coverage, raising the retirement age (to boost the finances of the systems), promoting higher labor force participation by older workers, encouraging higher levels of saving, reducing the pension gap for women and minorities, reducing leakage, reviewing COLA methods, and improving plan governance.

To its credit, the Mercer analysis offered up some “tips”[3] for those who would like to increase the ranking of the United States, specifically by:

• raising the minimum pension for low-income pensioners;
• improving the vesting of benefits for all plan members and maintaining the real value of retained benefits through to retirement;
• 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.

The first is doubtless targeted at Social Security’s minimums, the second perhaps a reference to (more?) accelerated vesting schedules, though the narrative seemed to be emphasizing 100% at all points. The last two might well do something for retirement security scoring — at least if one overlooks the potential negative impact on deferral rates by individuals concerned about access to those funds (again, the report’s focus is outcomes, rather than “in-comes”).

So, what should we make of this report — and its findings? Well, clearly most of the guideposts outlined and prioritized in this report are beyond our individual reach to implement. Moreover, there are some significant costs and behavioral shifts attached to most. 

The reality is that what “works” in Iceland (or Denmark or New Zealand) might not be practical here for a variety of factors. I’d (still) argue that the private retirement system we have in place, however patchwork in its designs, works pretty well[4] — at least for those who have access to it. 

And THAT is something we can perhaps do something about…

Footnotes

[1] The report acknowledges that each overall index value takes into account more than 50 indicators, some of which are based on data measurements which can be difficult to compare between systems.

[2] However, the U.S. index value increased from 60.3 in 2020 to 61.4 in 2021 primarily due to an increase in the net replacement rates, higher household savings and an increase in the value of the assets held in private pension arrangements.

[3] Still, of all the tips put forth by the Mercer one that seemed more obvious to me—and not on their list—was expanding coverage. Of course, if you look at the coverage of Social Security, you might not see a problem there. On the other hand, one might well question the long-term sustainability of that program based on its own trustees’ report—and that likely explains the C in “sustainability.”

[4] Remarkably well, in fact, considering it’s largely voluntary, both by the employers that provide that benefit, and the workers who choose (by action or inaction) to participate.