Personal Finance
Here’s why the U.S. retirement system isn’t among the world’s best
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The U.S. retirement system doesn’t get high marks relative to other nations.
In fact, the U.S. got a C+ grade and ranked No. 29 out of 48 global pension systems in 2024, according to the annual Mercer CFA Institute Global Pension Index, released Tuesday. It analyzed both public and private sources of retirement funds, like Social Security and 401(k) plans.
A similar index compiled by Natixis Investment Management puts the U.S. at No. 22 out of 44 nations this year. Its position has declined from a decade ago, when it ranked No. 18.
“I think [a C+ grade] would describe a rating where there is a lot of room for improvement,” said Christine Mahoney, global retirement leader at Mercer, a consulting firm.
The Netherlands placed No. 1, followed by Iceland, Denmark and Israel, respectively, which all received “A” grades, according to Mercer. Singapore, Australia, Finland and Norway got a B+.
Fourteen nations — Chile, Sweden, the United Kingdom, Switzerland, Uruguay, New Zealand, Belgium, Mexico, Canada, Ireland, France, Germany, Croatia and Portugal — got a B.
Of course, retirement systems differ since they address a nation’s unique economies, social and cultural norms, politics and history, according to the Mercer report. However, there are certain traits that can generally determine how well older citizens fare financially, the report found.
The U.S. system is often referred to as a three-legged stool, consisting of Social Security, workplace retirement plans and individual savings.
The lackluster standing by the U.S. in the world is largely due to a sizable gap in the share of people who have access to a workplace retirement plan, and for the ample opportunities for “leakage” of savings from accounts before retirement, Mahoney said.
Employers aren’t required to offer a retirement plan like a pension or 401(k) plan to workers. About 72% of workers in the private sector had access to one in March 2024, and about half (53%) participated, according to the U.S. Bureau of Labor Statistics.
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“The people who have [a plan], it’s probably pretty good on average, but you have a lot of people who have nothing,” Mahoney said.
By contrast, some of the highest-ranked countries like the Netherlands “cover essentially all workers in the country,” said Graham Pearce, Mercer’s global defined benefit segment leader.
Additionally, top-rated nations generally have greater restrictions relative to the U.S. on how much cash citizens can withdraw before retirement, Pearce explained.
American workers can withdraw their 401(k) savings when they switch jobs, for example.
About 40% of workers who leave a job cash out “prematurely” each year, according to the Employee Benefit Research Institute. A separate academic study from 2022 examined more than 160,000 U.S. employees who left their jobs from 2014 to 2016, and found that about 41% cashed out at least some of their 401(k) — and 85% completely drained their balance.
Employers are also legally allowed to cash out small 401(k) balances and send workers a check.
While the U.S. might offer more flexibility to people who need to tap their funds in case of emergencies, for example, this so-called leakage also reduces the amount of savings they have available in old age, experts said.
“If you’re someone who moves through jobs, has low savings rates and leakage, it makes it difficult to build your own retirement nest egg,” said David Blanchett, head of retirement research at PGIM, Prudential’s investment management arm.
Social Security is considered a major income source for most older Americans, providing the majority of their retirement income for a significant portion of the population over 65 years old.
To that point, about nine out of 10 people aged 65 and older were receiving a Social Security benefit as of June 30, according to the Social Security Administration.
Social Security benefits are generally tied to a worker’s wage and work history, Blanchett said. For example, the amount is pegged to a worker’s 35-highest years of pay.
While benefits are progressive, meaning lower earners generally replace a bigger share of their pre-retirement paychecks than higher earners, Social Security’s minimum benefit is lesser than other nations, like those in Scandinavia, with public retirement programs, Blanchett said.
“It’s less of a safety net,” he said.
“There’s something to be said that, as a public pension benefit, increasing the minimum benefit for all retirees would strengthen the retirement resiliency for all Americans,” Blanchett said.
That said, policymakers are trying to resolve some of these issues.
For example, 17 states have established so-called auto-IRA programs in a bid to close the coverage gap, according to the Georgetown University Center for Retirement Initiatives.
These programs generally require employers who don’t offer a workplace retirement plan to automatically enroll workers into the state plan and facilitate payroll deduction.
A recent federal law known as Secure 2.0 also expanded aspects of the retirement system. For example, it made more part-time workers eligible to participate in a 401(k) and raised the dollar threshold for employers to cash out balances for departing workers.
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Meanwhile, J.P. Morgan raised its odds for a U.S. and global recession to 60%, by year end, up from 40% previously.
“Disruptive U.S. policies has been recognized as the biggest risk to the global outlook all year,” J.P. Morgan strategists said in a research note on Thursday.
Allianz’s Chief Economic Advisor Mohamed El-Erian also warned on Friday that the risk of a U.S. recession “has become uncomfortably high.”
‘There is some nervous energy’
“There is some nervous energy there,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York, of the conversations he is having with his clients.
Even though stocks took a beating on Friday, “we advise them to focus on fundamentals and what they can control, which means maintaining a strong cash reserve and discipline around cash flow so that they can stay in the market and feel confident about taking advantage of buying opportunities,” said Boneparth, a member of the CNBC Financial Advisor Council.
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Recession or not, maintaining a consistent cash flow and investment strategy is key, other experts say.
“The best way to manage these moments is to maximize your current and future selves is to block out noise that doesn’t apply to your plan,” said CFP Preston Cherry, founder and president of Concurrent Financial Planning in Green Bay, Wisconsin.
Letting emotions get in the way is one of “the greatest threats to life and money plans,” said Cherry, who is also a member of the CNBC Advisor Council.
When it comes to volatility tolerance, sharp drops in the market are to be expected, the advisors say.
“The stock market is unpredictable, but historically, there’s a trend in how the market recovers,” Cherry said.
“In years with market corrections and pullbacks, these are the worst days, which are followed by the best days,” he added.
In fact, the 10 best trading days by percentage gain for the S&P 500 over the past three decades all occurred during recessions, often in close proximity to the worst days, according to a Wells Fargo analysis published last year.
“Being out of the market and missing the best days and cycles after recessions significantly hurt portfolios in the long run,” Cherry said.
Boneparth said his clients also “know volatility and uncertainty is part of the game and, most importantly, know not to sell into chaos.”
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As U.S. markets continue to suffer steep declines in the wake of the Trump administration’s new tariff policies, you may be wondering what the next best move is when it comes to your retirement portfolio and other investments.
Behavioral finance experts warn now is the worst time to make any drastic moves.
“It is dangerous for you — unless you can read what is going to happen next in the political world, in the economic world — to make a decision,” said Meir Statman, a professor of finance at Santa Clara University.
“It is more likely to be driven by emotion and, in this case, emotion that is going to act against you rather than for you,” said Statman, who is author of the book, “A Wealth of Well-Being: A Holistic Approach to Behavioral Finance.”
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That may sound easier said than done when headlines show stocks are sliding into bear market territory while J.P. Morgan is raising the chances of a recession this year to 60% from 40%.
“When the market drops, we have sort of a herd instinct,” said Bradley Klontz, a psychologist, certified financial planner and managing principal of YMW Advisors in Boulder, Colorado. Klontz is also a member of the CNBC FA Council.
That survival instinct to run towards safety and away from danger dates back to humans’ hunter gatherer days, Klontz said. Back then, following those cues was necessary for survival.
But when it comes to investing, those impulses can backfire, he said.
“It’s an internal panic, and we’re just sort of wired to sell at the absolute worst times,” Klontz said.
‘Never trust your instincts when it comes to investing’
When conditions are stressful, our frame of reference narrows to today, tomorrow and what’s going to happen, Klontz said.
It may be tempting to come up with a story for why taking action now makes sense, Klontz said.
“Never trust your instincts when it comes to investing,” said Klontz, particularly when you’re excited or scared.
Meanwhile, many investors are likely in a fight or flight response mode now, said Danielle Labotka, behavioral scientist at Morningstar.
“The problem with that, in acting right away, is that we’re going to be relying on what we call fast thinking,” Labotka said.
Instead, investors would be wise to slow down, she said.
Just as grief requires moving through emotional stages in order to eventually feel good, it’s impossible to jump to a good investing decision, Labotka said.
Good investment decisions take time, she said.
What should be guiding your decisions now
Many investors have experienced market drops before, whether it be during the Covid pandemic, the financial crisis of 2008 or the dot-com bust.
Even though we’ve experienced volatility before, it feels different every time, Labotka said.
That can make it difficult to heed to the advice to stay the course, she said.
Investors would be wise to ask themselves whether their reasons for investing and the goals they’re trying to achieve have changed, experts say.
“Even though the markets have changed, why you’re invested, your values and your goals probably haven’t,” Labotka said. “These are the things that should be guiding your investments.”
While there is the notion that life well-being is based on financial well-being, it helps to take a broader view, Statman said.
At any moment, no one has everything perfect when it comes to their finances, family and health. In life, as in an investment portfolio, all stocks don’t necessarily go up, and it’s helpful to learn to live with the good and the bad, he said.
“Things are never perfect for anyone,” Statman said.
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