As the U.S. retirement industry shifts its focus from the accumulation of wealth to Americans’ need for a steady stream of retirement income, industry experts search for answers in what other countries are doing.
The United Kingdom, Australia, The Netherlands and Canada have all moved forward with plans to help their citizens better prepare for retirement, but every country handles retirement a little bit differently.
“There are four or five markets we can glean good ideas from. There is not any one country that has nailed the retirement challenge better than every other country,” says Bob Collie, chief research strategist, Americas Institutional for Russell Investments.
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Collie recently wrote a blog highlighting what the U.S. could learn from the United Kingdom.
“That market has gone through a transition very similar to the one the U.S. is going through in terms of working out if DB is sustainable for the majority of corporations or if they should move to DC,” he wrote.
Because the United Kingdom is a smaller country, initiatives can take hold much faster there, Collie says. The U.K. is putting a lot of thought into retirement income and the use of annuities and how to make sure all the money workers save for retirement “is actually used to provide for people throughout retirement and is not just a savings vehicle to spend really quickly,” Collie says.
A report from the National Employment Savings Trust in the U.K. suggested that retirement savings be broken down into three pots of money that can be used at different life stages throughout retirement. The first one would be an income drawdown fund that would provide employees with a steady income that protects against inflation and gives them the opportunity to withdraw some or all of their money. The second pot would be a cash lump sum fund that could be used for unexpected events without impacting a person’s core retirement savings. The third pot would provide lifetime income. This would be purchased over time out of the drawdown fund.
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About half of Americans do not have access to a workplace retirement account, says Arthur Noonan, senior consultant and actuary in Mercer’s Pittsburgh office. Many of those people plan to rely on Social Security as their main pool of funds in retirement, but Social Security likely won’t be enough. With the average American spending $50,000 or more a year in retirement, Social Security might not cut it.
Australia has spent the past 20 years addressing its retirement coverage gap.
“Australia attacked that aggressively quite a long time ago to a certain extent. They have universal coverage with a few exceptions,” Collie says. Their system has been in place long enough for other countries to see the outcome of their efforts.
The U.S. has dabbled with the idea of a national retirement program. President Obama proposed the myRa, a starter account for people who don’t have access to a workplace retirement program, during his state of the union speech in 2014. The program launched without much fanfare at the beginning of 2015.
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Many U.S. states are working on state-run plans that would act in the same way. Individuals who don’t have a workplace account could use the state program to save for retirement and employers would be required to facilitate the withdrawals from their employee paychecks.
“There are some operational details that doing this on the state level becomes a bit of a challenge,” Noonan says. It is especially difficult for smaller employers who may have different payroll systems than those at larger companies.
“It is not insurmountable, but to operationalize this, there’s a lot that needs to happen,” he says.
In Australia, there are fewer than 10 superannuation providers that people can choose from to manage their retirement funds, and all workers are expected to participate.
“That feels a lot more workable to me than 50, especially when you have a global workforce,” Noonan says.
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The Dutch have an interesting program that takes the best of both DB and DC plans and merges them into one program as a way to “share risk between the employer and employee,” Collie says.
In the Netherlands, companies have the ability to reduce pensions if the funded status deteriorates, says Noonan. “If you have the ability to respond to economic market stresses you will have a healthier market system,” he said.
In the U.S., employers who sponsor pensions don’t have the ability to respond to market stresses.
The U.S. is also dabbling in multiple employer plans. Switzerland and the Netherlands sponsor occupational plans that pool money over a larger group of people as a way to lower costs.
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Other countries have raised their retirement age to 70. The U.S. began its climb to age 67 back in 1983. “It is a very slow process,” says Noonan. “We really put that pain way off in terms of when it is starting to happen. Other countries are moving more aggressively to raise their retirement age.”
Some European countries have passed laws that increase the retirement age automatically as life expectancy increases. “They don’t have to take another political vote on it. It is automatic,” Noonan says.
He adds that the U.S. would really benefit from broader retirement coverage, making people save at a higher percentage, raising the retirement age and finding new ways to encourage people to save.
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In the past few years, the retirement industry has put more thought into how to get additional people to save for retirement. They introduced features such as auto enrollment and auto escalation to not only get people saving but to make sure they are increasing their contributions every year.
Paula Aven Gladych is a freelance writer based in Denver.
