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America's Retirement System Is Too Inconsistent

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The U.S. is exceptional, and therefore an outlier in lots of international comparisons. Our incomes are high and our taxes are low, which is good. But our health care bills are astronomical and our infant mortality rate is awfully high, too (for a wealthy country), which is bad.

When it come to pensions and other retirement income, though, the U.S. is pretty average. That, at least, is my reading of the Organization for Economic Cooperation and Development’s biennial “Pensions at a Glance” report, which came out Tuesday. ”Pensions at a Glance” is a terribly misleading name for a document that fills 167 densely packed pages, and you may interpret the scads of data in it differently. But I at least have backup from the 2017 Melbourne Mercer Global Pension Index, which was released in October and has a couple of handy rankings graphics that can in fact be perused at a glance and put the U.S. right around the middle of the 30 countries rated: just behind the U.K. and France, just ahead of Malaysia and Poland.

What’s curious about the U.S. retirement system, though, is that on average it’s actually well above the average for members of the OECD, the organization of the world’s affluent democracies.

For example, when you throw together payments from Social Security, defined-benefit pensions, defined-contribution 401(k)s and individual retirement accounts, retirement income in the U.S. looks generous:

Source: Bloomberg

When you look at the amount of money set aside to fund these retirement commitments, the U.S. system also looks quite solid by international comparison (the countries in the two charts are a not-entirely-random assortment of major OECD economies):

Source: Bloomberg

Where the U.S. system doesn’t look so good is in its inconsistency. Americans’ retirement situations vary dramatically depending on where they work, which generation they belong to, how good they’ve been about contributing to their 401(k)s, what they’ve chosen to invest that money in, and how they’ve chosen to withdraw it. Only 40.8 percent of the U.S. working-age population is covered by voluntary workplace pension or retirement-savings plans, according to the OECD. Another 19.3 percent have voluntary personal retirement accounts, but there’s overlap between the two groups. The mandatory pension plan, Social Security, replaces a relatively low percentage of earnings (38.3 percent for those with average incomes, compared with an OECD average of 52.9 percent). And while this country’s remaining defined-benefit pension plans are as a rule pretty generous, they are also as a rule underfunded, with an average funding ratio of 67.5 percent, compared with 88.7 percent in the U.K., 95 percent in Canada and 102.2 percent in the Netherlands.

One simple measure of the haphazardness of the U.S. system is this: The average income of those 66 and older here is, at 94.5 percent of the average income for the total population, above the OECD average of 87.6 percent. But the percentage of Americans 66 and older earning less than half the average income for the total population is, at 20.9 percent, way above the OECD average of 12.5 percent. We have a system of retirement savings that on the whole seems to exacerbate inequality rather than ease it.So that’s a shame, and I’ve grumbled about the flaws of the U.S. retirement system before. But when one looks at it in context (maybe “Pensions in Context” would be a more accurate name for the OECD report?), the U.S. situation actually seems relatively promising.

Social Security isn’t very generous by international standards, which means it’s also relatively cheap, with payments adding up to 7 percent of gross domestic product in 2013, compared with an OECD average of 8.2 percent. Fixing its looming funding shortfalls won’t be nearly as painful as in, say, Italy, where public pension payments account for 16.3 percent of GDP. The U.S. has shown that it’s capable of putting aside lots of money for retirement, if not necessarily in the most efficient or fair manner. Americans have also shown that they’re willing to work longer, with 31 percent of those aged 65 through 69 employed, compared with an OECD average of 20.9 percent. The U.S. isn’t aging as fast as other rich countries (and some not-so-rich countries).

To back up that third point, here’s a final chart, of old-age dependency ratios now and in the projected future. I’ve included a couple of non-OECD countries (Brazil and China) because the data’s available and because it’s interesting:

Source: Bloomberg

In lots of other affluent countries (and some not-so-affluent ones), it’s hard to envision anything other than reductions in retirement benefits down the road. The U.S., though, may actually be in a position to improve its overall retirement-income picture. Big employers have already made a lot of improvements in workplace 401(k) programs over the past few years; what’s been missing are good options for those with substandard workplace plans or none at all. Also generally missing are arrangements that encourage Americans to share longevity risk (which is what traditional pensions do) rather than everybody having to save enough money to make it to 105. Tellingly, Americans 65 to 74 are much better off relative to the OECD norm than those 75 and older.

So the U.S. has a flawed retirement-income system. But its flaws seem eminently fixable, which is better than a lot of countries can say.

— For more Bloomberg View columns, visit


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