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The American pension system does not score highly compared to other countries.
In fact, the US received a C+ grade and ranked 29th out of 48 global pension systems in 2024, according to the annual Mercer CFA Institute Global Pension. Indexreleased Tuesday. It analyzed both public and private sources of retirement funds, such as Social Security and 401(k) plans.
A similar one index compiled by Natixis Investment Management ranks the US at number 22 out of 44 countries this year. The country’s position has fallen from ten years ago, when it was at number 18.
“I think [a C+ grade] would describe a rating with a lot of room for improvement,” said Christine Mahoney, Global Pensions Leader at Mercer, a consulting firm.
The Netherlands ranked No. 1, followed by Iceland, Denmark and Israel, respectively, all of which received an “A” grade, according to Mercer. Singapore, Australia, Finland and Norway received a B+.
Fourteen countries – Chile, Sweden, Great Britain, Switzerland, Uruguay, New Zealand, Belgium, Mexico, Canada, Ireland, France, Germany, Croatia and Portugal – received a B.
Of course, pension systems differ because they focus on a country’s unique economies, social and cultural norms, politics and history, the Mercer report said. However, there are certain characteristics that can generally determine how well older citizens do financially, the report found.
The American system is often referred to as a three-legged stool, consisting of Social Security, workplace pension plans, and individual savings.
The US’s lackluster position in the world is largely due to a significant gap in the share of people who have access to a workplace retirement plan, and to the ample opportunities for savings to “drain” from accounts before retirement, said Mahoney.
Employers are not required to offer employees a retirement plan such as a pension or 401(k) plan. About 72% of workers in the private sector had access to one in March 2024, and about half (53%) participated, according to the U.S. Bureau of Labor Statistics.
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‘The people who have that [a plan]On average it’s probably pretty good, but there are a lot of people who don’t have anything,” Mahoney said.
In contrast, some of the highest-ranked countries, such as the Netherlands, “cover essentially all employees in the country,” says Graham Pearce, Mercer’s global benefits segment leader.
In addition, highly rated countries generally have greater restrictions relative to the U.S. on how much cash citizens can withdraw before retirement, Pearce explains.
American workers can withdraw their 401(k) savings if they change jobs, for example.
About 40% of employees leave a job payout “Prematurely” every year, according to the Employee Benefit Research Institute. A special academic study from 2022 surveyed more than 160,000 US workers who left their jobs between 2014 and 2016, and thought that about 41% have cashed out at least part of their 401(k) – and 85% have completely emptied their balance.
Employers are also legally allowed to cash out small 401(k) balances and send employees a check.
While the U.S. may offer more flexibility to people who need to dip into their money in an emergency, this so-called leakage also reduces the amount of savings they have available in old age, experts say.
“If you’re someone who moves through different jobs, has a low savings rate and has leakages, it becomes difficult to build your own retirement nest egg,” says David Blanchett, head of pension research at PGIM, the investment management arm of Prudential .
Social Security is considered an important source of income for most older Americans, providing the majority of retirement income for a significant portion of the population over age 65.
Until then, about nine in ten people are aged 65 and over were receiving Social Security benefits starting June 30, according to the Social Security Administration.
Social Security benefits are generally tied to a worker’s wages and work history, Blanchett said. The amount is for example pinned down up to the 35th highest salary year of an employee.
Although benefits are progressive, meaning that lower earners generally replace a greater portion of their salary before retirement than higher earners, the minimum Social Security benefit is lower than in other countries, such as those in Scandinavia, with public pension programs, said Blanchett.
“It’s less of a safety net,” he said.
“There is a case to be made that, as a public retirement benefit, increasing the minimum benefit for all retirees would strengthen retirement resilience for all Americans,” Blanchett said.
That said, policymakers are trying to solve some of these problems.
For example, 17 states have established so-called auto-IRA programs in an effort to close the coverage gap, according to the Georgetown University Center for Retirement Initiatives.
These programs generally require employers who do not offer a workplace retirement plan to automatically enroll their employees in the state plan and facilitate payroll deductions.
A recent federal law known as Secure 2.0 also expanded aspects of the pension system. For example, it made more part-time workers eligible to participate in a 401(k) and raised the dollar threshold for employers to pay out balances to departing employees.