Financial security in retirement is an important goal for working families not only in the United States. Retirees across the globe typically rely on a combination of public pensions (such as the U.S. Social Security system), private savings, and corporate pensions to pay their way after their paychecks have stopped. Modern industrialized countries, embracing the three-pillar philosophy advocated by the World Bank and others, have created complex pension landscapes that combine public and private provisions of old-age income.
However, achieving this security is an increasing challenge at a time when structural and demographic trends are putting ever-rising strains on government-paid income programs for the retired. Over the last several decades, many national pension systems have shifted some of the financial risk of retirement from society to the individual. Employers have shifted from defined benefit (DB) pensions, which guarantee retirees a regular payment every month no matter how long they live, to defined contribution (DC) retirement savings plans, which leave it to retirees to put aside enough money during their working lives to last them through their retired years. Demographically, multiple factors are at play. As life expectancy increases, pension accumulation must be larger to fund longer retirement. Entrance into the labor force is increasingly delayed by prolonged higher education, thus shortening the number of years that a worker saves for old age. Although a good argument can be made for restoring those lost years by delaying retirement, such a move is controversial and in many countries has yet to be effectively implemented. In the United States pressures on the pension system began to grow as the oldest of the babyboomer generation (those born between 1946 and 1964, became eligible for early retirement in January 2008. The number of boomers who reach retirement will steadily increase until 2030, when the entire boomer generation will be eligible for full retirement benefits. Because succeeding generations will be smaller, there will be fewer workers to pay boomers all promised Social Security and health care benefits at the same time that health care and other costs are growing.
As a result, Americans today face precarious retirement prospects that have only been made worse by the recession that began in 2007. In 2008, 64 percent of Social Security recipients depended on the program for half or more of their income. The program provided 90 percent of income or more for about one-third of recipients. Facing both funding pressures on Social Security and the results of the shift from defined benefit to defined contribution plans, it is only logical that a growing proportion of Americans lack confidence in their ability to live comfortably in retirement. The Gallup Economy and Personal Finance Poll indicates that only 46 percent of American workers in 2007 expected to have sufficient funds to live comfortably in retirement, compared with 59 percent five years earlier.
These trends are not unique to the United States. Facing similar dilemmas, the rich countries of the Organization for Economic Cooperation and Development (OECD) have cut their public pension promises by an average of 22 percent since 1990 through various pension reforms. These cuts have been implemented in a variety of ways, many of which are so complex that their full effect will not be apparent to workers until they retire. A few countries have coped with projected rises in public pension costs by adding a personal savings element that either supplements or in a few cases replaces the tax-financed public pension. The rationale behind these savings systems is that individuals should bear a greater portion of the cost of their own retirements. Because it is naïve to expect every worker to become a financial expert, these countries have created systems that make it easier for workers both to participate in investment decisions and to make appropriate investment choices. Using either mandatory participation or automatic enrollment, the national savings systems studied in this paper attempt to ensure that individuals will see their savings grow without having to acquire extensive knowledge or pay for expensive individualized investment advice.
This paper examines the current and planned retirement savings plans of four countries with unique pension systems – Australia, Chile, New Zealand, and the United Kingdom – and attempts to draw lessons for U.S. policymakers to use in their efforts to build a more sustainable pension system that can provide increasing retirement security for future generations.