Retirement funding seems to be very totally different relying on the place you reside.
While the United States leans closely on voluntary 401(k)-style financial savings plans, different nations depend on necessary contributions or extra conventional pensions to make sure broad protection and regular earnings.
Mercer CFA Institute Global Pension Index takes these structural variations into consideration when rating a few of the world’s greatest retirement systems.
“We do it because we want to give a picture of the retirement landscape,” mentioned Christine Mahoney, international pensions chief at Mercer, a consulting agency. “We try to look at what the public systems are, what the private systems are, and look at how people will fare in retirement across all of those.”
The U.S. retirement system obtained a C+ rating from the Mercer CFA Institute Global Pension Index in 2024. It ranked 29 out of 48 international pension systems assessed.
“It means that the system is solid, designed well, but there is a significant risk,” mentioned Mahoney. “And if we don’t clear that risk up, the system could be in some jeopardy.”
How the U.S. may ‘considerably’ enhance its C+ grade
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Countries around the globe are raising their retirement ages, in addition to requiring mandatory contributions into private retirement financial savings, in accordance with analysis from the Organisation for Economic Co-operation and Development. Experts recommend this might help tackle fashionable issues equivalent to individuals dwelling longer and fewer employees paying into the system.
“For the U.S. system, the thing that could change that grade significantly, the most important is actually coverage,” Mahoney mentioned. “Our 401(k) plans are voluntary.”
The Netherlands is ceaselessly given a high rating within the index. Mahoney says one of many key options that makes the Dutch system stand out is necessary contributions.
There are two broad fashions for retirement plans, and so they operate very otherwise:
- A outlined contribution plan, equivalent to a 401(okay) or individual retirement account, works like a bucket. Workers resolve how a lot to place in, the best way to make investments it and, in some circumstances, employers add to the bucket as properly. The steadiness at retirement depends upon contributions and funding returns, leaving the ultimate final result unsure. In the United States, participation in these plans is voluntary, and employees usually should select to choose in.
- A outlined profit plan resembles a faucet. Programs like Social Security or employer-sponsored pensions within the U.S. promise a gradual stream of earnings in retirement, typically based mostly on wage and years of service. It’s ceaselessly required that the employee fund this system, both by taxes or as grounds for employment. Employers or governments handle the funding and funding danger, whereas retirees obtain predictable month-to-month funds, usually for life.
What nations just like the Netherlands and Australia do otherwise from the U.S. is require employees to pay into outlined contribution plans.
“In the Netherlands … there’s a mandatory contribution made,” Mahoney mentioned. “You can’t opt out of it either as an employer or as an employee. So getting money [into defined contribution accounts] in the U.S. is a real challenge because it is a voluntary system. If we’re going to stay voluntary, then getting it easier to launch a plan and join a plan is the critical thing for [the U.S.] to focus on.”
Watch the video above to study extra about how the U.S. retirement system stacks up in opposition to these of nations just like the Netherlands and Australia.