America’s voluntary retirement plans are the envy of the world. Countries like Japan, South Korea, and the U.K. are trying to replicate the remarkable success of 401(k) plans and individual retirement accounts (IRAs), which have helped Americans from all walks of life build financial security and generational wealth.
Yet, it’s become fashionable to question the architecture of our retirement system, particularly voluntary retirement plans. Some critics advocate for tearing the entire system down to the studs, ignoring its successes and consistent improvements.
Some media outlets are also piling on with misleading criticisms. For example, a recent report by Mercer and the CFA Institute assigned a “C+” to the U.S. retirement system—the same grade as Kazakhstan’s—which one newspaper interpreted as indicating that “Social Security and 401(k) plans leave Americans less secure than retirees in much of the world.” While this alarmism makes for splashy headlines, the facts—even the ones in Mercer’s report—don’t back up this assessment.
ICI economists found that, adjusted for inflation, the typical American retiree maintains more than 90 percent of their average age 55-59 spendable income thanks to distributions from retirement plans and Social Security. Mercer and the CFA Institute seem to agree with that finding, acknowledging the U.S. has a high replacement rate of pre-retirement income. The Mercer study also gave the U.S. top marks for the tax treatment of its retirement plans and retirement assets relative to GDP. So why did their overall report give the U.S. a C+?
Criticizing a system that is working for so many people means ignoring the great strides our country has made to enable everyday Americans to share the successes of capital markets and retire comfortably.
Among other things, slower-than-average economic growth and a high government-debt-to-GDP ratio dragged down the overall rating—probably not the issues most would associate with a bad retirement grade. The U.S. was also downgraded because workers are not required to contribute to a retirement plan or required to take part of their retirement benefits as an annuity—apparently ignoring the requirement that American workers “contribute” payroll taxes into Social Security, which just so happens to pay out all benefits in the form of an annuity.
No retirement system is perfect, but the misperception lingers among policymakers that the voluntary component of the U.S. system is fundamentally broken. Just last month, a group of House and Senate lawmakers introduced a bill that would establish a defined contribution (DC) plan—similar to the Thrift Savings Plan (TSP)—administered by the federal government, with matching contributions paid for by taxpayers, which they estimate could cost a whopping $40 billion a year.
The bill is the latest attempt to extend the government’s reach into the voluntary retirement market, apparently on the belief that U.S. workers lack access to retirement plans.
But research shows that’s not the case. ICI analysis of IRS data reveals that more than 70 percent of retirees receive income from employer-sponsored plans or IRAs, either directly or through a spouse. That figure climbs to 98 percent when Social Security income is included.
Moreover, voluntary retirement plans have progressed significantly over time. Adjusted for inflation, retirement assets per household are more than seven-times greater than they were in 1975. And 91 percent of 401(k) participants were in plans with employer contributions as of plan-year 2020.
There’s always room for improvement in the U.S. retirement system. For example, the recently enacted SECURE 2.0 Act will help fill the gaps in retirement coverage by easing future workers’ path to saving and incentivizing small businesses to offer retirement plans.
Criticizing a system that is working for so many people means ignoring the great strides our country has made to enable everyday Americans to share the successes of capital markets and retire comfortably. Policymakers should instead work together with industry to strengthen the foundation of the system with those people in mind.
EDITOR’S NOTE: The preceding is an op-ed by Investment Company Institute Chief Economist Sean Collins on the success of the U.S. voluntary retirement system.
SEE ALSO:
• Controversial ‘Retirement Savings for Americans Act’ Reintroduced in Congress
• Countries That Beat the U.S. in Retirement System Ranking
Sean Collins is Chief Economist at the Investment Company Institute. He oversees the Institute's statistical collections and its research on U.S. and global funds, financial markets, the U.S. retirement market, and investor demographics. Before joining ICI in 2000, Collins was a staff economist at the Federal Reserve Board.
