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 auto-enrollment, 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 wish list? 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.