U.S. Drops Further in Retirement Security Index

Well, this is a bit of an embarrassment. The United States barely makes the top 20 in the latest retirement security rankings among developed countries, falling two spots to No. 18 in the latest Global Retirement Index, released Sept. 19 by Boston-based Natixis Investment Managers.

Now in its seventh year, the Natixis Global Retirement Index examines 18 factors which influence retiree welfare, in the areas of finances in retirement, material wellbeing, health, and quality of life. The Index calculates the relative performance for each of the 44 countries on each of these criteria, resulting in a composite score that provides a comparative tool for evaluating retirement security globally.

This year’s Index found the U.S. ranked the same or lower in all four sub-indices, including Material Wellbeing (28th from 26th), Finances (10th from 9th), Quality of Life (20th from 19th) and Health (held steady in 10th place). Despite rising employment in the U.S., the gap between wealthy and poor continues to grow. The Index found the U.S. has the eighth-worst score for income equality, even though it has the sixth-highest income per capita score among all countries on the Index.

The analysis by Natixis also identifies three global risks—low interest rates, longer lifespans and the high cost of climate change—that are weighing on retirees, policymakers and long-term global sustainability.

“Meeting the needs of today’s retirees while preserving retirement security for future generations continues to be one of the most pressing challenges for economies around the globe,” said Jean Raby, CEO at Natixis Investment Managers. “We created the Natixis Global Retirement Index to help facilitate a candid conversation about what steps need to be taken to ensure retirement security on a global scale.”

Factors affecting the U.S. GRI ranking

The following are additional notable factors affecting the U.S. position:

• Strong financial institutions, but growing pressure on government resources:The U.S. lost ground in the Finances category, but remains in the top 10. The Index reflects an increasing proportion of retirees to working adults, an ongoing trend that is putting growing pressure on Social Security and Medicare funds. Rising government debt and tax pressures also contributed to the U.S.’s lower score in the Finances category, which was offset by improvement in interest ratesand fewer nonperforming bank loans.
• Lower life expectancy despite health spend:The U.S. maintains its position in the top 10 (at 10th) for health due to an improvement in insured health expenditure, which measures the portion of that expenditure paid for by insurance, and by maintaining the highest score globally for per capita health spending. But the U.S. experienced a decline in life expectancy as Americans’ longevity failed to keep pace with that of top-ranked Japan and other nations.
• Quality of life in relation to retirement security:A lower score for happiness, which evaluates the quality of retirees’ current lives, weighed on the U.S.’s Quality of Life performance. However, the U.S. continues to achieve the seventh-highest score for air quality on the Index and it showed improvement in its environmental factors indicator score, though not enough to lift it out of the bottom 10 in that category.

More highlights from the 2019 GRI

• Western Europe continues to lead as a region, with 15 countries finishing in the top 25 for the third year in a row. The Nordic countries maintain their strong performance in the top 10, including Iceland (No. 1), Norway (No. 3), Sweden (No. 6) and Denmark (No. 7).
• Ireland advanced to No. 4 from No. 14 two years ago due to an improved score in the Health sub-index, where it moves into the top 10 (from 19th), driven primarily by the country’s higher per capita health spending. The country also performed well in Finances, powered by improvements in bank nonperforming loans and government indebtedness.
• Japan, which ranks No. 23, stands out for having the lowest score among GRI countries for old-age dependency, a measure of the number of active workers compared to the number of retirees. Japan has the highest life expectancy, but also one of the lowest fertility rates among developed countries. Despite having the highest score for employment in the Index, Japan has a small proportion of working-age individuals supporting those in retirement. This reflects a broader trend affecting many developed economies.

Three pressing risks for retirement security

The Natixis report, “Global Security. Personal Risks,” supplements the 2019 Index and illustrates three pressing risks and their implications for retirees and future generations globally. The analysis serves to encourage dialogue among policymakers, employers and individuals to understand the impact and help manage the risks to society.

1. Interest rates:Interest rates do not appear to be rising anytime soon, and the related low yields on investments present hurdles for those looking to generate income in retirement. As a result, retirees may be forced to invest in higher-risk assets, thus exposing their portfolios to greater volatility at an age when they might not have time to recoup losses due to a market downturn. Indeed, more than four in 10 Baby Boomers (aged 55-73 years) in the U.S. surveyed by Natixis earlier this year said they were blindsided by the market downturn in 2018.
2. Demographics: Longevity represents a key risk for retirees. A Natixis survey of Boomers found that one of their biggest fears is outliving their assets in retirement. In the U.S., the ratio of older adults to working-age adults is climbing. By 2020, there will be about 3.5 working-age adults for each retirement-age person; by 2060, that ratio will fall to just 2.5. This leaves policymakers with hard choices on how to address the funding crunch.
3. Financial and health impacts of climate change: The risk of climate change is often viewed through a long-term lens, but it poses tangible health and financial risks to today’s retirees. The costs associated with natural disasters help force up insurance rates and consume government resources. Munich Reinsurance Company reports that severe events helped make 2018 the fourth-costliest year for insured losses since 1980.Similarly, extreme heat has increased the risk of illness among older adults, particularly those with chronic illnesses, according to the U.S. Environmental Protection Agency.

Millennials lead emphasis on sustainable investing

The rapidly aging population in the U.S. means a large percentage of people depend on Social Security payments at a rate that threatens the long-term sustainability of the nation’s retirement system.

At the same time, younger generations are leading the charge for long-term sustainability, seeking to have a positive impact on the world and, ultimately, their retirement security. Natixis research found Millennial investors (aged 23-38) in the U.S. are more likely than older generations to align their personal and environmental and social values with investing and purchasing decisions:

• 59% of Millennials vs. 48% of Boomers invest with the purpose of making a positive social or environmental impact.
• 64% of Millennials vs. 42% of Boomers actively seek out investment opportunities that align with their personal values.
• 69% of Millennials vs. 48% of Boomers look to buy products from companies that align with their personal beliefs.
• 66% of Millennials would be more likely to increase contributions to their retirement plan if they knew their investments were doing social good; that compares with 50% of Boomers.

“The Natixis Global Retirement Index has helped us initiate a dialogue about how to ensure retirement security,” said Ed Farrington, EVP of Retirement Strategies at Natixis Investment Managers. “In the U.S., this dialogue is taking place, and progress is being made. The design of workplace savings plans has improved, efforts are under way to expand access to retirement plans and employers are offering sustainable investment choices. Our research shows that workers are more likely to save for retirement if their investments also are doing social good, and plan sponsors are beginning to realize that incorporating responsible investments doesn’t necessarily require a trade-off with performance.”

To download the full Global Retirement Index, visit im.natixis.com/us/research/2019-global-retirement-index.