Hannah M. from Des Moines, IA asks: Hello Mitch, I saw an article last week saying that the United States gets a “C+” in retirement readiness. I know that’s a passing grade, but it doesn’t seem very good at all. I understand that’s a problem for folks who are getting older and aren’t ready. But do you think it could be a problem for the economy long term as well? Thank you.
Mitch’s Response:
Thanks for sending in your question. To clarify for readers who may not have the article you mentioned, there was a recent study by the Mercer CFA Institute Global Pension Index ranking developed countries’ retirement systems. The U.S. got a “C+” and ranked 22 out of 47 countries. As you say, that’s not very good at all.1
To be clear, the analysis did not look at retirement readiness so much as it evaluated each country’s retirement systems. Don’t get me wrong, the U.S. also has a retirement readiness problem, but the study itself was focused on programs like Social Security, 401(k)s in the workplace, and other ways workers and employers utilize retirement accounts and programs to save.
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In the Netherlands—which finished first—there are three components to their retirement systems to help get workers and citizens to build financial security. The first layer is a public pension that pays a flat rate to every citizen depending on how long they’ve lived and worked in the country. It’s similar to the U.S.’s Social Security program. The second layer is semi-mandatory (depending on company size) to provide all workers with a pension, which used to be commonplace in the U.S. but was largely replaced by voluntary 401(k) plans. The final layer is also similar to what we have in the U.S., where Dutch workers can contribute to and invest in individual retirement accounts.
The U.S. retirement system gets dinged because Social Security’s finances are not stellar, in addition to a lot of infighting in Congress about the program’s future and how to fund it. There’s also the issue of 401(k) plans, which about half of small businesses do not have and large businesses may or may not offer. With American workers increasingly working in the “gig economy” or starting small businesses, there is an accessibility problem when it comes to retirement planning, according to the study.
The SECURE 2.0 Act seeks to address some of these issues, offering tax credits to small businesses for starting a 401(k) plan. There is also a mandatory enrollment feature that kicks in soon, which can help get more workers saving automatically. But by and large, the onus is on the individual to take steps and seek advice needed to get retirement ready. At Zacks Investment Management, we help investors analyze their financial situation and goals to help determine if they’re on the right track or if more work is needed to get retirement ready.
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