(Bloomberg View) — If you’re worried about your retirement, a group of U.S. actuaries has some good news: There are better models than either the traditional pension or the 401(k) plan. In fact, they found two systems that are affordable, relatively safe and should pay you enough to live on.
Here’s the bad news: One of those systems exists only on paper. And the other one’s in Canada.
America’s Retirement Gap
A task force set up by the American Academy of Actuaries looked at five retirement systems, giving each a letter grade based on sustainability, efficiency and governance. A common 401(k)-type, defined-contribution approach got a C, accompanied by the usual complaints: It expects too much foresight from employees while saddling them with too much risk, among other things.
That doesn’t mean the U.S. would be better off if more large employers had stuck with defined-benefit pension plans. That system got a C+, on the grounds that it’s efficient but often poorly run, and that leaving employers alone to carry the shortfalls caused by market shocks isn’t sustainable.
So what are the alternatives? The task force gave a B+ to the hybrid pension model used in South Dakota. Even better was a plan proposed in 2013 by then-Senator Tom Harkin, an Iowa Democrat, which would help workers who didn’t already have access to an employer’s retirement plan by automatically enrolling them in a government-run fund. The task force gave that plan an A-.
But Harkin’s bill, which the Bloomberg View editorial board supported, generated just three co-sponsors (none Republican) and never made it out of committee. The auto-enrollment retirementsystem adopted this month by Illinois shares some of that plan’s features — except for a default contribution rate that’s just half as much as Harkin’s, making it unlikely to generate enough savings.
The only approach that got an A-level grade from the task force and is actually in effect is in New Brunswick. There, the government revamped its pension rules in 2012, adopting what it calls a “shared risk” model.