Wednesday, May 29, 2013

Pensions, How They Do It Elsewhere

The following was written by Steven Greenhouse and published in the New York Times on May 14, 2013, in the post he compares how the US is doing in providing pensions with some other countries. An interesting read.

The United States can boast that it has the world’s best basketball players, fighter jets and country and western singers. But hardly anyone would ever boast that the United States has the world’s best retirement system.

Fifty-eight percent of American workers are not even in a pension or 401(k) plan. The Social Security system faces the threat of a huge shortfall. One-third of America’s retirees get at least 90 percent of their retirement income from Social Security, with annual benefits averaging a modest $15,000 for an individual. And just ask any participant in a 401(k) plan about the scary roller-coaster ride of the last six years.

Scores of other countries have elaborate retirement systems, and some of them avoid the biggest pitfalls of America’s retirement system.

In Australia, there is nearly universal participation among workers in a 401(k)-type retirement plan because of a government mandate. In the Netherlands, pension laws require that workers’ 401(k)-like plans be converted into lifetime annuities to ensure they do not spend down all their savings before they turn 75 or 80.

In Britain, the government has pressed retirement fund managers to keep administrative fees on many plans to less than half the average in the United States.

A new report ranking various countries’ retirement systems gives the United States a C, considerably worse than the A received by Denmark and the B-plus given to the Netherlands and Australia. The study, by the Mercer consulting firm and the Australian Center for Financial Services, weighs adequacy of benefits, breadth of coverage and other factors, and points to numerous weaknesses in the American system.

Those shortcomings include contribution rates too low to assure adequate retirements for middle-class Americans and many workers withdrawing large sums from their 401(k)’s before they retire.

The report also cites poverty-level retirement benefits for many low-income workers and pensions that fail to keep up with inflation. It also points to the common practice of retirees withdrawing large sums from their 401(k)’s soon after retiring, leaving many without an adequate income stream if they live past 80.

Lia van Wijk, 58, the chief financial officer at a policy research center in Amsterdam, praises the Dutch retirement system, which combines a Social Security-like fund with a nearly universal pension system to which employers contribute.

“It’s rather a good system,” she said, noting that she had at first worried that she would not have a large enough pension because she had once spent many years traveling abroad. But now she feels reassured, having steered additional money into her pension fund.

Ms. Van Wijk likes the Dutch system of converting workers’ pension reserves into an annuity upon retirement. “There are real advantages to taking an annuity,” she said.

She complained, however, that the Netherlands had increased its retirement age from 65 to 66 1/2. Fearing budget deficits and large unfunded retirement liabilities, the Netherlands has joined Britain, Italy, the United States and other countries in raising its retirement age, a move that increases contributions to the system while holding down outlays.

“The Dutch realize that there can be too much leakage,” said Peter Kiveron, director of the Holland Financial Center, a research group, insisting that the United States and other countries make it too easy for people to take large amounts out of their 401(k)’s long before they retire and as soon as they retire, causing people to run out of funds well before they turn 75 or 80. “The Dutch have learned their lessons and have a very rigid system.”

Even a cursory study of retirement systems abroad makes clear that many countries are far more willing than the United States to mandate painful steps by employers and workers.

Chile requires workers to contribute 10 percent of each paycheck to a 401(k)-type fund. In Australia, employers must contribute 9 percent of each worker’s salary into a retirement fund, and that contribution is set to rise to 12 percent in 2020. Australia’s politicians, conservative and liberal, concluded that the country’s version of social security was providing retirees with too paltry a basic retirement check.

In the United States, such moves would prompt many to denounce heavy-handed grabs of workers’ pay and expensive burdens on employers. But experts say it would be wise to study other nations’ systems for tips on strengthening America’s system.

John A. Turner, director of the Pension Policy Center in Washington, said some foreign features might not fit American culture, like mandated participation in the pension system as in Australia and Chile. He does not advocate such a mandate.

“We’re quite different from many other countries,” he said. “There’s an emphasis on individual freedoms and rights and responsibilities versus collectivism — although I admit we will never have high pension coverage without some form of mandate.”

“In the United States, collective is a four-letter word,” agreed Harry Smorenberg, head of a Netherlands-based consulting firm on pensions and founder of the World Pension Summit.

The United States does have some mandates, although they are often overlooked. Employers must pay 6.2 percent of each employee’s salary into Social Security, and every employee must also contribute that amount.

A second pillar of America’s retirement system — 401(k)’s — is voluntary, although some employers have embraced automatic enrollment for their employees while giving them the right to opt out. The third pillar is individual savings, including individual retirement accounts or I.R.A.’s. The Center for Retirement Research at Boston College warned that 53 percent of American households were at risk of not having enough to maintain their living standards in retirement.

Teresa Ghilarducci, a professor of economics at the New School, said America’s voluntary system was badly broken because nearly six out of 10 workers were not in pension or 401(k) plans. She favors an Australia-type mandate.

“We use our tax code far more than other countries to try to encourage socially beneficial behavior,” she said. “We’re spending hundreds of billions of dollars to incent people to save for retirement through 401(k)’s and I.R.A.’s. That costs us a huge amount of money without much effect on getting people to save for retirement.”

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