Americans always like to consider themselves first in just about everything, so news that the U.S. ranks 19th in retirement security may come as very disappointing to many. But that is where the recently published 2015 Natixis Global Retirement Index places the U.S. — a spot it has held steady for three years running.
The Natixis Global Retirement Index is based on an analysis of four key trends across four broad categories: finances in retirement, health, quality of life, and material well-being.
“We look at each of those individually and then we combine the score, which is where we derive the rankings from,” said Ed Farrington, executive vice president Natixis Global Asset Management.
Topping this year’s ranking was Switzerland, followed by Norway, Australia, Iceland, the Netherlands, Sweden, Denmark, Austria, Germany, New Zealand, Luxembourg, Canada, Finland, Republic of Korea, the Czech Republic, Belgium, Japan, France, and the United States.
The study found that that the U.S. got strong grades for its finances, largely due to low inflation and interest rates, and enjoyed higher gross domestic product growth, but its position in the rankings may still be fragile. A key factor is its out-of-balance healthcare system.
For example, “the U.S. benefits from high per-capita income and spends more per capita on healthcare than any other nation. However, those resources don’t reach all Americans. The U.S. has a relatively large gap in income equality, and Americans have access to fewer doctors and hospital beds than citizens in other developed nations,” the study summary reported.
Ranked 19th, and Holding
To be fair, placing 19th in a ranking of 150 nations worldwide is no shabby feat. But the U.S. appears stuck there, while some other countries have shown improvement over the three years of rankings.
“Out of 150 it’s a place where you say, ‘that’s fine’,” Farrington said. “But I think as a nation we strive for better, and one of the things that certainly goes against us is that, while we’re number one in per-capita spending on healthcare, it doesn’t always translate into the outcomes you’d expect. One of the outcomes we point to is that it hasn’t translated into improved life expectancy. So while we’re spending a lot of money in that space, we’re not necessarily getting the results.”
Farrington said he is not surprised that the U.S. didn’t rank higher in the study, this year or in the prior two.
“Let me provide a little color around that. If you look at the four different categories, historically the best environments have been when there are three legs to the financial stool. Those legs would be participation from the government, participation from an employer, and obviously participation from the individual. We’ve seen over the last 30 years more of the responsibility in the U.S. falling on the shoulders of the individual,” Farrington said.
“One of the reasons being as we have an increasing debt load, the systems [in place] such as Social Security and Medicare are not as predictable or reliable as we might have hoped,” Farrington said. “More and more you’re seeing that burden shifted to the individual, they’re going to have to put away more money, and they need more incentive to put away more money. And we haven’t seen a dramatic change in policy over the past several years. That’s my overall reason for saying I’m not shocked. “
Great News From the Scandinavian Region
The fact that so many of the Scandinavian countries scored so well on the index was not lost on Farrington.
“I think there are two clear categories where they do well,” Farrington said. “From the health side, they have well-funded and broad access to healthcare. And secondly, the equivalent of Social Security is well-funded and projects better for a longer period of time in terms of what people can expect for participation from the state.
“That being said, I do think when you’re looking at an economy and a political system as complex as the U.S., it may not always be a completely fair analogy. For example, we saw Iceland move dramatically this year. That was the result of having a very difficult time in the financial crisis, but very quickly taking steps to correct that, and we see those gains with their banking system becoming much more reliable and more predictable over the last year. In contrast, if you look at the size and scale of the U.S. economy versus some of these smaller countries – it’s the equivalent of trying to turn a tanker versus a sports boat – it’s a little easier to move a smaller boat.”
Another important factor in how quickly and easily a nation can act on retirement related issues is local politics.
“We have a system where the level of debate is rigorous and very broad in terms of the different political leanings of different parts of the country,” Farrington said. “All of that has to be reconciled before you can see change enacted. I’m not surprised by some of those findings. I do think there are things we can learn.”
Lessons to Be Learned From New Zealand
One nation that the U.S. can learn a lot from is New Zealand, Farrington believes.
“I’ve really been drawn to over the past few years to what has occurred in New Zealand, and specifically around the Kiwi Saver Program. That program has been enacted now for seven or eight years. When you look at the success of it, it is hard not to say that we could draw from it,” Farrington explains.
By success, what Farrington means is broad participation in an employer-based retirement planning system.
“I think that broad participation is driven by access, incentive, and auto-enrollment. Those are the three things I would point to,” Farrington said. In the Australian system, “Folks are auto-enrolled. If they have a job they are automatically enrolled. You have to actually opt out in order to not participate. But in order to opt you have to forego the $1,000 kick-starter that the government provides and a compulsory 3% match from your employer.”
“When people are automatically enrolled and then they recognize that there are these very strong incentives in place, I think that is why they stay enrolled and participate in these plans,” Farrington said. “And the access is very broad. You can be under age 16 and participate in these plans with consent of a parent.”
Farrington said there are some very strong indications that the Australian plan design has led to a much stronger participation by both individuals and employers, and this reflects in better index projections. If true, that could bode well in U.S. states that choose to follow the recent example of Illinois, with the recently enacted Secure Choice.
“What are they doing that looks somewhat similar to New Zealand? The auto enrollment piece,” Farrington said. “Right now let’s take the national average and apply that to Illinois. Fifty percent of those folks don’t have access to a retirement plan. Well in 2017 those 50 percent will. They will be able to payroll deduct to a Roth IRA.”
Illinois’ Secure Choice Could Be the Key for America
Farrington hopes that more states will follow the Illinois lead, and indeed a few are looking at similar programs. He believes that will be the key to avoiding a so-called “retirement crisis.”
“I see two very different pictures” in terms of retirement preparedness in America, Farrington stresses. “One is the picture of those who have access to a workplace plan where they can defer part of their paycheck in order to be prepared for a future date.”
“I’ll give you an example from another survey that we did over the summer,” Farrington explains. “We surveyed 401(k) plan participants. These were people who had access to an employer plan. What you found out from that survey was that 9 out of 10 people participating are in fact putting some money away.”
Digging deeper, “when you look specifically at the Baby Boomer there were a couple of things that jumped out of that survey. The Baby Boomers in that survey on average had saved about $260,000. They have a self-stated goal of wanting to save over $800,000 before retiring, so while they’ll falling short, $260,000 is nothing to sneeze at. And they still have anywhere from 5 to 12 or 13 years left to save. That is one picture – those who have access to a workplace plan. And certainly those who have a match from an employer are in a better place.”
“The bleaker picture is for those that don’t have access, and what avenues and what tools do they have to start really preparing for this inevitable day when they will, at a minimum, see their income reduced if not stop working all together.”
Finally, Farrington does see another bright spot in retirement preparedness among Americans – the awareness among Millennials that they need to be saving now.
“I’ll point again to the study we did over the summer because we have the millennials broken out as well,” Farrington said. “The millennials, when asked, say they will probably need about $822,000 by the time they retire. They have already, on average, saved $91,000 toward that goal. That is an encouraging sign. Some of those folks have 40 years left to save. If they’re active, and they’re participating in these plans, and they’re educated, then we do see some hope there for that generation.”