Retirement preparedness around the world has only slightly improved since 2012 as investors in some areas have increased savings while others reported a decreasing sense of personal responsibility for saving, according to a report by Aegon.
Longevity exacerbates these effects, as the period of time investors need to save for and the number of people covered by social programs increase.
“Rapid demographic change means that it is inevitable that governments will continue to withdraw from providing the sort of safety net in retirement that they were able to for previous generations,” Alex Wynaendts, CEO of Aegon, wrote in the report. He noted that “stagnating economic growth in much of the world” has made it more difficult for less highly paid people, like women and young workers, to begin saving for retirement.
Aegon has been conducting its Retirement Readiness Survey, including the Retirement Readiness Index, since 2012. The 2016 report, “A Retirement Wake-Up Call,” includes a five-year trend analysis of the nine countries from the original report, as well as new findings from the entire 15-country sample. The 2016 report includes responses collected in February from 14,400 employees and 1,600 retirees in Australia, Brazil, Canada, China, France, Germany, Hungary, India, Japan, the Netherlands, Poland, Spain, Turkey, the United Kingdom and the United States.
The recommendations to improve retirement preparedness Aegon makes in the report include broad cultural shifts like encouraging habitual, lifelong saving and promoting healthy aging, as well as plan design and policy changes like designing more inclusive workplace plans and facilitating flexible retirements.
In the nine original countries, the retirement readiness index has increased from 5.2 in 2012 to 5.5. A score between 6 and 7.9 shows a “medium” or moderate level of preparedness. Of the original nine, the United States showed the greatest increase in preparedness, from 5.6 to 6.7 on the index, “reflecting that people are more likely to feel personally responsible for their retirement planning,” according to the report.
Although respondents showed improvements in behaviors like understanding and awareness, planning and progress toward their income goals, the limited increase in the index is partly due to respondents’ lack of personal responsibility in saving. That score fell by 2.8%.
Expanding the index to include the six new countries (Australia, Brazil, Canada, China, India and Turkey), the index fell from 5.9 in 2015 to 5.8.
Short-term financial shocks in the countries that reported a decline are partly to blame, the report found. Improvements in the U.S. and U.K. are “likely not a coincidence,” according to the report, as “widespread access to personal pension and retirement products” gives investors more control over their retirement savings.
4 Solutions for Individuals, Policymakers
Most respondents agreed that funding retirement was a shared responsibility between governments providing social security systems and individuals saving for retirement. Although favor skewed slightly toward governments shouldering more of the responsibility, Aegon acknowledged that increased longevity around the world means governments and defined benefit sponsors alike are struggling to maintain their plans’ sustainability.
“Maintaining this delicate and harmonious balance requires shared cooperation among governments, employers and individuals,” according to the report.
Aegon identified four areas where policymakers, plan sponsors and individuals could step up efforts to improve retirement preparedness.
Workplace retirement plans. Policymakers and plan sponsors could do more to improve access and participation in workplace retirement plans, the report noted. Aegon suggested that policymakers should increase incentives and remove barriers to implementing plans and making them available to all workers.
Plan sponsors should improve participation in workplace plans with matching contributions and automatic enrollment. The report noted that areas with strong defined contribution markets scored higher on the index. Just 41% of workers have access to a retirement plan with employer contributions, Aegon found.
Furthermore, part-time and low income workers are less likely to have access to workplace retirement plans, groups that tend to include women and younger workers. High-income workers were twice as likely to have access to a workplace plan with employer contributions, and just 32% of part-time workers had access, compared with 44% of full-time.
Automatic escalation. Similarly, Aegon recommended more retirement plans implement auto-escalation in payroll deductions. Although automatic enrollment is common in retirement plans, sponsors have been less inclined to automatically increase participants’ contributions. A March report by Willis Towers Watson found that in 2014 plan years, more than half of Fortune 100 companies had auto-enrollment programs; of those, 58% also offered automatic escalation.
Aegon recommended sponsors and workers agree on predetermined triggers for automatic escalation to kick in, such as with raises or at certain ages, or as other financial obligations like mortgage or student loan debt are paid off.
Financial literacy. More needs to be done to increase individuals’ financial literacy, a role that employers and governments can share, Aegon recommended. Education on the need for retirement planning, how to save and the benefits of working longer are important, according to the report. Forty-two percent of respondents said they don’t have a retirement strategy or don’t know if they do, and 45% have a strategy but it’s not written down.
Employers can help by providing access to digital planning tools that help workers create balanced portfolios. Aegon found that “while few workers say that they are provided such tools, the majority of those who are offered them find them very or extremely helpful in preparing for their retirement.”
Individual retirement planning. Finally, individuals need to share more of the burden of planning and saving for retirement. The report encouraged investors to “take advantage of any professional advice or other tools in modeling their retirement,” including digital advice platforms and robo-advisors.
However, rather than focusing solely on saving enough, an individual’s retirement plan should also address the decumulation phase.
Despite increasing longevity, the average age at which respondents expect to retire has fallen to 65 from almost 66 in 2012, the report found, and younger workers expect to retire before 65.
Aegon recommended employers offer phased retirement as a benefit, something 58% of respondents were interested in but only 28% of whom were offered. Reskilling programs are another important and underutilized benefit.
Investors must also take aging into account. The United States Administration on Aging found that 69% of people who reach age 90 will have a disability, according to Aegon, but only 17% of respondents associated retirement with ill health. The report found more people rely on savings than insurance to manage the risk a poor health as they age, with just 19% securing critical illness insurance.
— Read 5 Shocking Facts About Retirement Health Care Costs on ThinkAdvisor.