Grading on a ‘Curve’

A recent analysis of world pension systems gave America a passing grade, but not a good one.

The latest—the Mercer CFA Institute Global Pension Index[i]—gave the United States a C+ (though a B in adequacy!) ranking our retirement “system” well down (22nd) in the list of 47 retirement income systems around the world.?

This particular index is comprised of three sub-indices: adequacy, sustainability and integrity, which the authors say are used to measure each of the retirement systems against some 50 “indicators.”[ii] Of course, people are entitled to establish whatever criteria they think is reasonable in such matters, but those who would accept their grading at face value would be well-advised to consider both the assumptions and weighting applied to derive those outcomes. To the sponsors’ credit, the 144-page document provides lots of opportunity to do just that.?

Perhaps the biggest challenge of a system like ours matched up against some of these other systems is the sheer diversity not only of our population, but the system itself. The coverage gap[iii] we’re focused on closing presents a considerable disadvantage compared to systems that employ nationwide mandates.? And, let’s face it, the funding issues of Social Security loom ever larger, and undermine the “sustainability” measure of this index, if not the “integrity.”?

If one were to take the recommendations of these authors to heart, in order to boost our grade, we’d need to make people contribute more, make them wait longer to get their benefits, pay them (particularly lower-income workers) more benefits, increase vesting so that they earn more benefits faster, and limit their ability to tap into those retirement benefits before retirement—both by leakage, but also in requiring that some part of those benefits be taken as an income stream.

Said another way, provide more government benefits and make people put in more (and don’t let them take it out) so that they will have more later. This, by the way, has been a consistent recommendation (though perhaps worded more eloquently) of this index.

One thing that is NEVER mentioned, or even acknowledged in this report is the cost of these measures, the taxes imposed to produce them. Or the willingness of the population to undertake them to the exclusion of other considerations. They aren’t, ironically enough, “means” tested.

That’s not their responsibility, of course. Arguably presenting these retirement system alternatives around the world provides policymakers and the populace alike with a broader perspective—ideas and approaches to consider, albeit those concocted in a pristine laboratory environment where costs and personal choice are of no matter—only the largesse of benefits.?

But for those of us living in the real world, and those still working on implementing the tools in the SECURE Acts—I’d give this assessment a grade of “incomplete.”

?

[i] In case you’re wondering, Netherlands, Iceland, Denmark & Israel topped the list (again), all receiving an “A” grade, at least based on the criteria and weighting adopted by the index. The index has been published for a number of years now, and while Mercer’s role has been consistent, different parties (now the CFA Institute) have partnered in its production over the years.

[ii] The report explains that each system’s overall index value is calculated by taking 40% of the adequacy sub-index, 35% of the sustainability sub-index and 25% of the integrity sub-index—weightings that they say “have remained constant since the first edition of the Index in 2009.”

[iii] Indeed, it would be na?ve to gloss over the gaps in retirement security that a largely voluntary system exposes. Not that anything (beyond inertia and human nature) prevents every American worker from opening their own retirement account. But we know, and the data supports, that even modest income ($30,000-$50,000/year) workers are 12-15 times more likely to do so when they have the opportunity to do so via a workplace plan. In fact, there’s plenty of impetus in the provisions of the SECURE and SECURE 2.0 Acts to encourage the formation of those plans.