Yes, we get it. Everything is better in the Scandinavian countries—herring, sexy accents and now retirement security. Among the leading countries for retirement security identified by the 2016 Global Retirement Index, Northern Europe dominated. Norway came in at No. 1, followed by Switzerland, Iceland, Sweden, Germany, The Netherlands and Austria. They were joined by New Zealand (No. 4), Australia (No. 6) and Canada (No. 10).
As for the United States? It ranked ranks 14th (14th!), according to the report from Natixis Global Asset Management. The index examined key factors that drive retirement security and provides a comparison tool for best practices in retirement policy across 43 countries.
“Retirement used to be simple: Individuals worked and saved, employers provided a pension, and payroll taxes funded government benefits, resulting in a predictable income stream for a financially secure retirement,” John Hailer, CEO of Natixis Global Asset Management in the Americas and Asia, said in a statement. “Demographics and economics have rendered the old model unsustainable, but the leaders in our index are finding innovative ways to adapt to the new reality and provide a blueprint for the rest of the world.”
Despite many positives, warning signs clear for the U.S.
The U.S. ranking benefits from high per capita income, the stability of its financial institutions and its low rate of inflation, according to index data compiled by Natixis. In addition, the nation’s unemployment rate has moved lower, continuing a long-term trend.
In contrast to these positive factors, the U.S. has one of the highest levels of income inequality among developed nations, putting the goal of retirement savings beyond the reach of millions. The U.S. also has a growing ratio of retirees to employment-age adults, which means there are fewer workers to support programs such as Social Security and Medicare, putting increasing pressure on those government resources over time. That trend, combined with the broader shift from defined-benefit to defined-contribution employer retirement plans, is transferring the burden of retirement financing to individuals.
Americans recognize the shift in funding responsibility
American investors are acutely aware of increasing the need for individuals to fund a greater share of retirement. In a survey of investors conducted by Natixis earlier this year, 75 percent said this responsibility increasingly lands on their shoulders.
However, many Americans may be underestimating how much money they need to save in order to retire comfortably. Investors estimate they will need to replace only 63% of their current income when they retire, well short of the 75 percent to 80 percent generally assumed by planning professionals.
In addition, a large segment of Americans simply doesn’t have access to employer-sponsored savings programs such as 401(k) plans. The U.S. Department of Labor estimates that one-third of the nation’s workforce doesn’t have access to a retirement plan. A separate Natixis survey of participants in defined-contribution plans found that, even when they have access to a plan, four in 10 contribute less than 5 percent of their annual salary.
U.S. investors see clear hurdles to financial security in retirement, identifying their three greatest challenges as long-term care and healthcare costs, not saving enough, and outliving their assets. When asked how they would make up for an income shortfall, two-thirds of U.S. investors say they will continue to work in retirement.
“Americans must come to grips with their increasing responsibility for their own retirement security,” added Ed Farrington, Executive Vice President of Retirement Services for Natixis Global Asset Management. “The leading nations in our research are developing effective solutions, but we also need greater commitment by decision makers, engagement by individuals and a willingness to learn from the experiences of other countries around the world.”
Four Global Trends
Policymakers and employers can learn from four major trends that characterize the top-ranked nations.
- Access: An aging workforce and increased lifespans in many Western countries have made traditional pay-as-you-go models for government retirement benefits unsustainable. As individuals assume greater responsibility for their retirement funding, public policy makers in leading countries must ensure that workers have access to individual or work-based savings programs.
- Incentives: Smart policy expands incentives for individuals to save for retirement in order to help reduce the long-term challenges in providing support for retirees. Favorable tax treatment for retirement savings helps workers put away more money, making it more likely they can take care of their own needs.
- Engagement: Automatic enrollment in workplace retirement plans is a step in the right direction. Good policy also may ensure that workers have the right balance of investments and enough information to help them maximize the benefits of plan participation.
- Economics: Retirement security extends beyond the savings vehicles themselves. It includes consideration for an aging population that will be living on a fixed income. Monetary, fiscal and healthcare policies all play roles in ensuring that retirees are self-sufficient.
“The U.S. faces the stark proposition of fewer workers supporting more retirees, and it is up to policymakers, employers and the investment industry to find innovative solutions to ensure workers have the tools and incentives they need to save enough for retirement,” Hailer concluded. “Achieving retirement security is a daunting goal, but it is within reach if everyone does their part. Failure is not an option.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
