The U.S. retirement system gets a ‘C+’ grade, experts say — even though it’s worth $39 trillion. Here’s why

The U.S. retirement system may seem flush — yet it ranks poorly in relation to those in other developed nations.

Collectively, Americans had more than $39 trillion in wealth earmarked for old age at the end of 2021, according to the Investment Company Institute.

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However, the U.S. places well outside the top 10 on various global retirement rankings from industry players, such as the Mercer CFA Institute Global Pension Index and Natixis Investment Managers 2021 Global Retirement Index.

According to Mercer’s index, for example, the U.S. got a “C+.” It ranked No. 17 on Natixis’ list.  

Here’s why the U.S. falls short, according to retirement experts.

Iceland topped both lists. Among other factors, the country delivers generous and sustainable retirement benefits to a large share of the population, has a low level of old-age poverty, and has a higher relative degree of retirement income equality, according to the reports, which use different methodologies.

Other nations, including Norway, the Netherlands, Switzerland, Denmark, Australia, Ireland and New Zealand, also got high marks. For example, Denmark, Iceland and the Netherlands each got “A” grades, according to Mercer’s index.

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Where the U.S. largely lags behind those countries, experts said, is that its retirement system isn’t set up so that everyone has a chance at a financially secure retirement.

“Even though we have $40 trillion invested, it’s a very uneven, fragmented, patchwork retirement design that we work with in the U.S.,” said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University. “Some people do very, very well but a lot of other people are left behind.”

Consider this statistic: Just three of the 38 countries in the Organization for Economic Co-operation and Development rank worse than the U.S. in old-age income inequality, according to the bloc of developed countries.  

Indeed, poverty rates are “very high” for Americans 75 years and older: 28% in the U.S. versus 11%, on average, in the OECD.

The U.S. retirement system is often called a “three-legged stool,” which consists of Social Security, workplace arrangements such as pensions and 401(k) plans, and individual savings.

One of the structure’s primary shortfalls is a lack of access to workplace savings plans, according to retirement experts.

Just over half — 53% — of U.S. workers had access to an employer-sponsored retirement plan in 2018, according to a recent estimate by John Sabelhaus, a senior fellow at the Brookings Institution and adjunct research professor at the University of Michigan. That’s an improvement from nearly 49% a decade earlier, he found.

Approximately 57 million Americans fell in the retirement savings coverage “gap” in 2020, meaning they didn’t have access to a workplace plan, according to a Center for Retirement Initiatives analysis.

The U.S. has a voluntary retirement savings system. The federal government doesn’t require individuals to save, or businesses to offer a pension or 401(k). Individuals also shoulder more personal responsibility to build a nest egg as businesses have largely transitioned away from pension plans.

By contrast, 19 developed nations require some level of coverage, by mandating businesses offer a retirement plan, that individuals have a personal account, or some combination of the two, according to OECD data. In 12 of the countries, the arrangements cover more than 75% of the working-age population. In Denmark, Finland and the Netherlands, for example, the share is near 90% or more.

In Iceland, where coverage is 83%, the private-sector retirement system “covers all employees with a high contribution rate that leads to significant assets being set aside for the future,” Mercer wrote.

Of course, people in the U.S. can save for retirement outside the workplace — in an individual retirement account, for example — if their employer doesn’t offer a retirement plan.

But that often doesn’t happen, Antonelli said. Just 13% of households contributed to a pre-tax or Roth IRA in 2020, according to the Investment Company Institute.

IRAs held nearly $14 trillion in 2021, almost double the $7.7 trillion in 401(k) plans. But most IRA funds aren’t contributed directly — they were first saved in a workplace retirement plan and then rolled into an IRA. In 2019, $554 billion was rolled into IRAs — more than seven times the $76 billion contributed directly, according to ICI data.

Lower annual IRA contribution limits also mean individuals can’t save as much each year as they can in workplace plans.  

Americans are 15 times more likely to stash away retirement funds when they can do so at work via payroll deduction, according to AARP.

“Access is our No. 1 issue,” Will Hansen, chief government affairs officer at the American Retirement Association, a trade group, said of workplace retirement savings. Employees of small businesses are least likely to have a 401(k) available, he added.

“[However], the retirement system is actually a good system for those who have access,” Hansen said. “People are saving.”

But the retirement security offered by that savings is tilted toward high-income households, according to federal data.

Low earners, by contrast, “appear more prone to having little or no savings in their [defined contribution] accounts,” the Government Accountability Office wrote in a 2019 report. A 401(k) plan is a type of defined contribution plan, whereby investors “define,” or choose, their desired savings rate.

Just 9% of the bottom quintile of wage earners have retirement savings, versus 68% of middle-income earners and 94% of the top quintile, according to a Social Security Administration report from 2017.

Overall savings are also “constrained” by low wage growth after accounting for inflation and increasing out-of-pocket costs for items such as health care, the GAO said. Longer lifespans are putting more pressure on nest eggs.

Social Security benefits — another “leg” of America’s three-legged stool — help make up for a shortfall in personal savings.

About a quarter of senior households rely on these public benefits for at least 90% of their income, according to the Social Security Administration. The average monthly benefit for retirees is about $1,600 as of August 2022.

“That doesn’t put you much above the poverty level,” Antonelli said of Social Security benefits for people with little to no personal savings.

There are also some looming structural issues with the Social Security program. Absent measures to shore up its financing, benefits for retirees are expected to fall after 2034; at that point, the program would be able to pay just 77% of scheduled payments.

Further, individuals can raid their 401(k) accounts in times of financial distress, causing so-called “leakage” from the system. This ability can infuse much-needed cash into struggling households in the present, but may subject savers to a shortfall later in life.

The “leakage” factor, coupled with relatively low minimum Social Security benefits for lower earners and the projected shortfall of the Social Security trust fund, “will have a significant impact on the ability for the U.S. pension system to adequately provide for its retirees in the future,” said Katie Hockenmaier, U.S. defined contribution research director at Mercer.

Of course, it can be tough to compare the relative successes and failures of retirement systems on a global scale.

Each system has evolved from “particular economic, social, cultural, political and historical circumstances,” according to the Mercer report.

“It’s hard to state the U.S. is really far behind when there are so many other external policies countries make that impact their citizens and how effective their retirement will be in the long run,” Hansen said.

Flaws in health-care and education policy bleed into people’s ability to save, Hansen argued. For example, a high student debt burden or big health bills may cause an American borrower to defer saving. In such cases, it may not be fair to place primary blame on the structure of the U.S. retirement system, Hansen said.

And there have been structural improvements in recent years, experts said.

The Pension Protection Act of 2006, for example, ushered in a new era of saving, whereby employers started automatically enrolling workers into 401(k) plans and increasing their contribution amounts each year.

More recently, 11 states and two cities — New York and Seattle — have adopted programs that require businesses to offer retirement programs to workers, according to the Center for Retirement Initiatives. They can be 401(k)-type plans or a state-administered IRA, into which workers would be automatically enrolled.

Federal lawmakers are also weighing provisions — such as reduced costs relative to factors like plan compliance and a boost in tax incentives — to promote more uptake of 401(k) plans among small businesses, Hansen said.

“In the past 15 years — and now with considerations of additional reform in Secure 2.0 [legislation] — there’s been a tremendous amount of progress in recognizing there’s room for the improvement of design of our U.S. retirement system,” Antonelli said.