Investor Alert

Robert Powell

Nov. 3, 2011, 12:01 a.m. EDT

5 ways to improve the U.S. retirement system

U.S. has 10th best pension system of 14 countries studied

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By Robert Powell, MarketWatch

BOSTON (MarketWatch) — Different year. Same problems.

One year ago, the U.S. had the 10th best retirement-income system in the world. One year later, that hasn’t changed, according to the third annual study of the pension systems of 16 countries by Mercer and the Australian Centre for Financial Studies.

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In its study, Mercer and ACFS measured the overall pension benefits that are being provided to the citizens of 16 countries, the likelihood that those systems will be able to provide benefits in the future, and the integrity of private retirement plans. (In previous years, the report assessed 14 countries.)

And, same as last year, the U.S. didn’t get such high marks. In fact, the U.S. earned a “C” grade for its pension-plan system according to the 2011 Melbourne Mercer Global Pension Index, the same grade awarded to Poland and Brazil. Read the Global Pension report here.

The Netherlands and Australia earned the highest grades, a B+, for their respective retirement-income systems. Read my column from last year on the Melbourne Mercer index.

By its own admission, Mercer and ACFS said comparing diverse retirement-income systems around the world is not easy.

“Retirement-income systems are diverse and often a number of different programs,” according to a report published by the Organization for Economic Cooperation and Development in March 2011. “Classifying pension systems and different retirement-income schemes is consequentially difficult.” Read the OECD’s report, “Pensions at a Glance 2011,” here.

At the moment, no country has a gold-standard pension system according to the Melbourne Mercer index. To receive a best-in-class grade, the researchers said a system would have to provide adequate retirement benefits, be sustainable over the longer term and be trusted due to its strong and robust governing structures.

Critics of the study

For his part, Nevin Adams, the director of education and external relations at the Employee Benefit Research Institute and the co-director of EBRI’s Center for Research on Retirement Income, suggested that Americans should view the rankings with a large grain of salt.

“I wouldn't put too much stock in the rankings, though I think it's an interesting exercise,” Adams said. “Pension system evaluation is something of a moving target these days.”

Adams said that many of the retirement-income systems examined in the Melbourne Mercer index are “themselves undergoing significant restructuring, and that the evaluations, at least in some cases, seem to reflect a version of the system which isn't likely to be in place in five years, and which, in many cases, will, I think, be less ‘generous.’”

Five ways to fix the U.S. system

The researchers who created the Melbourne Mercer index said that Uncle Sam could raise its overall grade by 1) raising the minimum pension for low-income pensioners; 2) adjusting the level of mandatory contributions to increase the net replacement ratio for median-income earners; 3) improving the vesting benefits for all plan members and maintaining the real value of retained benefits through to retirement; 4) reducing pre-retirement leakage by further limiting the access to funds before retirement; and 5) introducing a requirement that part of the retirement benefit must be taken as an income stream.

Retirement-income experts said the researcher’s recommendations are not new ideas, but they did agree, in the main, that acting on those suggestions would improve the overall U.S. retirement system.

“The recommendations for the U.S. are not surprising, or striking,” Adams said. “You could sum it up by saying, ‘make people contribute more, make them wait longer to get their benefits, pay them (particularly lower income workers) more benefits, increase vesting so that they earn more benefits faster, and limit their ability to tap into those retirement benefits before retirement.’ Essentially, make people put in more so that they can get more later.”

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