A new report out today calls for reforms to the current U.S. retirement system by proposing a more modern framework to support the needs of today’s retirees, incorporating the best elements from both defined contribution and defined benefit plans.
“Many countries are grappling with the conundrum of how to fund this expanded retirement period with a declining worker-to-retiree ratio.”
Surya Kolluri, Head of TIAA Institute
The report by TIAA Institute says best way to create a sustainable and secure retirement that addresses the challenges of longer lifespans and divergent working patterns is to develop a “hybrid” system consisting of the best elements from DB and DC plans—including diversified sources of income and a form of guaranteed income.
The report, The Future of Retirement Security, studies the transition of seven countries from defined benefit to defined contribution retirement plans.
According to the report, as lifespans increase and the number of employees with access to DB plans decrease, many countries are implementing interesting solutions to offset challenges created by an expanded retirement period.
Research shows the average retiree can expect to spend about two decades in retirement, roughly double the time from 50 years ago. In addition, four in 10 Americans are at risk of outliving their retirement savings, and 57 million workers do not have a retirement savings plan—underscoring what the report calls the severity of the retirement crisis.
“Life expectancy has risen by 17 years in the United States since the Social Security program debuted nearly 90 years ago,” said Surya Kolluri, Head of TIAA Institute. “This comes with tremendous opportunities, but it also comes with headwinds. Combine increased life expectancy with lower birth rates and lower productivity growth, many countries are grappling with the conundrum of how to fund this expanded retirement period with a declining worker-to-retiree ratio.”
Need for a hybrid system
As the retirement landscape and projected lifespan of retirees continues to evolve, researchers say so should the plans and policies that support them. The best way, the report says, would be to develop a “hybrid” system taking the best from both DC and DB plans.
Per the report, the system should include:
- Universal access to a high-quality retirement plan that can also provide income in retirement
- A contribution rate that is high enough to fund a secure retirement
- Risk sharing between participants, employers and governments to keep the system sustainable and equitable
- Flexibility and portability to align with evolving working patterns
- Strong fiduciary oversight, plan design and advice to help individuals make good choices
The key to building a retirement savings that will sustain retirees through the ups and downs of market fluctuations or other life challenges is to create a plan that includes diversified sources of income, including a form of guaranteed income. Adding a source of guaranteed income, such as a pension or annuity, is one of the best ways to create an additional stream of income that individuals cannot outlive, the report says.
“In our vision for the future, all U.S. workers are automatically enrolled into a robust, cost-effective retirement plan,” said Bret Hester, EVP, General Counsel and Head of Government Relations, TIAA. “Workers who don’t want to choose their own investments would be defaulted into a well-designed investment solution that can easily be converted into a guaranteed income stream or other payout option at retirement.”
Comparing countries
Countries selected for the study include: the United States, the United Kingdom, Canada, Australia, the Netherlands, Singapore, and Sweden. Researchers say while each country’s retirement system is unique, they all fall within two general categories: “Individual Choice” and “Collective Choice” systems. The Individual Choice (IC) countries—the US, Australia, Canada and the UK—strongly emphasize individual responsibility and choice. The Collective Choice (CC) countries—the Netherlands, Sweden, and Singapore—place more emphasis on collective risk sharing and limit individual choice.
Researchers say a successful retirement system possesses four key attributes: adequacy, sustainability, equity, and plan design. And while it is impossible to maximize each attribute simultaneously, a successful system should include a balance of the first three attributes (adequacy, sustainability, and equity), while plan design incorporates each factor to deliver positive outcomes for retirees.
“All countries included in this report have strengths and weaknesses in their retirement systems,” said Brendan McCarthy, Head of Nuveen Retirement Investing. “A successful system needs to leverage the best elements of defined benefit and defined contribution plans to find a balance between the goals of adequacy, sustainability and equity.”
The full report can be found at the TIAA Institute’s website.
SEE ALSO:
• Employees Unhappy with Retirement Benefits
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.