We’re Number One (In Retirement Readiness Among Surveyed Wealthy Countries)
May 31, 2018 by Elizabeth Bauer
The Aegon Center for Longevity and Retirement just published the results of the 2018 version of its triennial Retirement Readiness Survey, titled “The New Social Contract: a blueprint for retirement in the 21st century,” and the headline number from this study, the Aegon Retirement Readiness Index, a measure of the average retirement readiness of the 15 countries surveyed, puts the United States as tops—if one excludes Brazil, China, and India, that is. In fact, the U.S. index, on a scale of one to 10, increased from 5.6 in 2012 to 6.5 in 2018, and bests a number of countries which are considered as having better provision for their people than the U.S.: including Germany (6.1), Australia (5.9) and the Netherlands (5.7), among others.
What’s the Social Contract?
Before getting into the numbers, let’s address the title: what’s the “New Social Contract”? The report, in addition to providing statistics, also addresses a theme each year it’s produced. This year, the authors report that the current retirement Social Contract—that is, the traditional expectation that the government/Social Security, employers, and individuals are partners in providing for retirement provision—is crumbling. Government provision needs reform in order to become sustainable; employer-sponsored defined contribution plans, where they exist, are replacing defined benefit pensions and even these are not available to contingent workers; and individuals face more responsibility than they’re prepared to take on.
The report thus proposes that we re-envision the Social Contract as having many more partners, including academics, think tanks and other researchers, financial service providers, healthcare providers who can promote healthy aging, and charities and nonprofits to help the needy elderly. It also proposes some key “design features.” Social Security benefits should be sustainable and equitable. Retirement savings programs should be accessible to all, not contingent on employer benefit choices, and reflect “auto” features such as autoenrollment, auto-escalation, and appropriate default investments. Retirees should have lifetime income solutions. Financial literacy should be boosted, and government policies should enable older adults to continue working, both in terms of health and workforce opportunities. And, finally, support for elders, both in terms of attitudes and more literal supports such as accessibility modifications to homes, should be a part of the discussion around retirement, rather than a narrow perspective of retirement finances.
Is this too long a wishlist? I’m not sure. Some of it is aligned with my thinking, for example, when, in an earlier article, I reminded readers that, regardless of what benefits our employers may provide, we are all eligible to save with IRAs, and suggested that we could all benefit from community organizations promoting IRAs and other elements of financial wellness. Coming from 20 years of employment as an actuary, one item that requires something of a perspective-adjustment is to see how little a role employers play in this broader “compact,” and how much their role shifts from direct retirement provision to being able to create the right environment for continued, perhaps part-time employment.
What is this study?
The study itself is based on surveys with 900 workers and 100 retirees in each of 14 countries, and double this number in China, and the index is calculated based on responses to six questions that ask about behaviors and attitudes relating to retirement:
- Do individuals have a sense of personal responsibility for retirement income?
- Are they aware of the need to plan for retirement?
- Do they have sufficient financial understanding to make these plans?
- How well-developed are their plans?
- How prepared are they, financially, for retirement?
- And will they be able to replace their income in retirement?
This means that, to fare well in this index, it’s not enough for a country to have a generous Social Security system; while a strong state pension system is important, the report’s authors acknowledge that, due to the need for these systems to be sustainable into the future, even more-generous countries need for their population to take personal responsibility. In fact, Sweden, often cited for the generosity of its social welfare spending, while no longer in the index, was very much in the middle of the pack when it was included in 2012, because high scores for taking personal responsibility for retirement savings were not followed up upon by actually undertaking retirement planning and savings.
There are notable differences among countries—and not necessarily what you’d expect.
When asked to what extent respondents feel personally responsible for their retirement income, the United States scores highest, on average, and France, Spain and Hungary are clustered at the bottom.
When asked whether future retirees will be better or worse off than current retirees, Chinese and Indian respondents are fairly confident in their countries’ future economic growth, with a mere 13% and 17%, respectively, choosing the “worse off” answer. All other countries are more pessimistic, with the next-lowest “worse off” response at 44% in Australia, and with France and Germany at 70% and 72% respectively. Japan, surprisingly, despite its low birth rate, falls in the middle of the pack, with 59% choosing “worse off.”
Japan is also odd in other respects. Its respondents were the least likely (40%, vs. an average of 57%) to say that an autoenrollment feature would be desirable in a retirement savings program. It scores at the bottom, and very much so, on the question, “how are you able to understand financial matters when it comes to planning for your retirement?” (2.92, vs. a mean of 3.74, and the next-lowest at 3.35), as well as the question, “how well developed would you say your personal retirement plans currently are?” (2.66 vs. a mean of 3.21 and the next-lowest at 2.90). They also rank at the bottom in terms of self-identified sufficiency of their savings, and their estimate of how successful they will be at reaching their retirement income goal is also lowest.
What’s going on here? Shouldn’t they be panicked? Or are there other factors that this study is missing, for example, an expectation that children will care for their elders?
Another noteworthy item is the score of countries’ respondents to the “Big Three” financial literacy questions. These are three questions which indicate the degree of financial literacy in three main areas — how interest works, how inflation works, and how investment diversification works. On average, 30% of respondents got all three questions correct, and the country averages (including the U.S.) were fairly heavily clustered around this average — but Germany has a considerably higher result than the rest, with 45% of those surveyed getting all three questions correct. Of the three questions, the question on diversification — whether a single stock or a mutual fund is a safer investment — was the most difficult for workers, with an average of 45% answering correctly, ranging from a low of 34% in the Netherlands and a high of 63% in Germany (46% of Americans got this right, 1% higher than the average).
What about high-scorers China, Brazil and India? The report provides an additional window onto retirement readiness in Brazil. The country still has a generous Social Security system, and, while actual fertility rates have dropped to such a degree that this is not sustainable, public perception is still that of a young country. What’s more, the country culturally tends to be very optimistic about life and carry a conviction that things will fall into place without pre-planning. Hence, the country scores well on measures of confidence even if its people ought to actually be more concerned: they score high on feelings of personal responsibility for retirement income, awareness of the need to plan for retirement, self-assessment of understanding of financial matters, and confidence in achieving retirement goals. And the workers in each of these three countries expect, on average, to retire at age 60, far lower than the ages of 65 – 67 of all other countries, with the further except of Turkey.
But is there something more going on here? These are surveys of workers—but was the survey process the same in each country, or were the respondents for these three countries not apples-to-apples with other countries, by being limited, say, to urban white-collar or factory jobs, which are not representative of the country’s workers as a whole? In any case, these oddities suggest that their answers are not as informative as others.
Who is Aegon?
The Aegon Center for Longevity and Retirement is the research group of Aegon, a multinational based in the Netherlands (Transamerica in the United States) which is, as it calls itself, “one of the world’s leading providers of life insurance, pensions and asset management” —which is itself interesting because the Netherlands is a country with cursory similarities but very meaningful differences in its pension system. After all, what firm in the United States would identify itself in such a manner, as a provider of pensions (annuities)? The very fact that at Dutch-based firm puts out this study is a reminder that, although many of the issues are specific to individual countries (there are no Taft-Hartley multiemployer plans in the Netherlands!), the notion that retirement readiness concerns are specific to the American economy and everyone else has got it figured out, is mistaken; instead, these concerns stretch far beyond this country.
