After studying international retirement systems, researchers from the TIAA Institute are proposing a new U.S. model featuring a “hybrid” system consisting of the best elements from defined contribution (DC) and defined benefit (DB) plans.

In noting that the average retiree can now expect to spend about two decades in retirement, roughly double the time from 50 years ago, the study (The Future of Retirement Security) looks at how seven countries have adapted their retirement systems to account for these extended lifespans and other challenges.

Countries selected for the study include: the United States, the United Kingdom, Canada, Australia, the Netherlands, Singapore, and Sweden. The researchers explain that, while each country’s retirement system is unique, they all fall within two broad categories: “individual choice” and “collective choice” systems. The individual choice (IC) countries – the US, Australia, Canada and the UK – strongly emphasize individual responsibility and choice. The collective choice (CC) countries – the Netherlands, Sweden, and Singapore – place more emphasis on collective risk sharing and limit individual choice.

Yet, as lifespans increase and the number of employees with access to DB plans decrease, many countries are implementing solutions to offset challenges created by an expanded retirement period, the report observes.

“Life expectancy has risen by 17 years in the United States since the Social Security program debuted nearly 90 years ago,” stated Surya Kolluri, Head of TIAA Institute. “This comes with tremendous opportunities, but it also comes with headwinds. Combine increased life expectancy with lower birth rates and lower productivity growth, many countries are grappling with the conundrum of how to fund this expanded retirement period with a declining worker-to-retiree ratio.”

4 Key Attributes

The researchers say a successful retirement system possesses four key attributes: adequacy, sustainability, equity, and plan design. And while it is impossible to maximize each attribute simultaneously, a successful system should include a balance of the first three attributes (adequacy, sustainability, and equity), while plan design incorporates each factor to deliver positive outcomes for retirees.

Consequently, they suggest that the best way to create a sustainable and secure retirement that addresses the challenges of longer lifespans and divergent working patterns is to develop a hybrid system that includes:

• Universal access to a high-quality retirement plan that can also provide retirement income;
• A contribution rate that is high enough to fund a secure retirement;
• Risk sharing between participants, employers and governments to keep the system sustainable and equitable;
• Flexibility and portability to align with evolving working patterns; and
• Strong fiduciary oversight, plan design and advice to help individuals make good choices.

As such, to sustain retirees through market fluctuations or other life challenges, the study suggests creating a plan that includes diversified sources of income, including a form of guaranteed income.

Countries are approaching this challenge in different ways, depending on their existing model. The CC countries, from a starting point close to DB plans, continue to convert assets into a guaranteed income stream at retirement, but they have shifted increasing risk to retirees through mechanisms such as market-based annuitization formulas or adjustment mechanisms to cut benefits if funding limits are breached.

The IC countries, on the other hand, coming from a starting point of DC plans, are trying to introduce more longevity risk sharing and guaranteed income. Legislators, meanwhile, have introduced initiatives promoting annuitization – such as the retirement income covenant in Australia, or the SECURE 1.0 and 2.0 Acts – and product providers have developed solutions embedding automated ways to convert savings into income using target date funds.

“In our vision for the future, all U.S. workers are automatically enrolled into a robust, cost-effective retirement plan,” said Bret Hester, EVP, General Counsel and Head of Government Relations at TIAA. “Workers who don’t want to choose their own investments would be defaulted into a well-designed investment solution that can easily be converted into a guaranteed income stream or other payout option at retirement.”

As for adequacy, there are no shortcuts, the study further warns. The countries with the highest replacement rates in retirement also have the highest contribution rates during the working career. For instance, the Netherlands, which typically achieves high scores on global comparisons of retirement systems, does this by having a mandatory total pension contribution rate (employer plus employee) of 37% of average salary. In contrast, the “individual choice” countries tend to have lower mandatory contribution rates, but also corresponding lower replacement rates in retirement.

That said, it is important to strike the right balance between freedom of choice and protection against poor choices, the study advises. For example, it notes that U.S. 401(k) plans have a well-established fiduciary system, where the plan sponsor is responsible for selecting and approving the investment products offered. By contrast, Singapore and Sweden initially adopted an open marketplace approach where savers could choose funds from an open architecture platform with little oversight of the offered funds. This led to expensive or even fraudulent investments being offered, as savers were not able to adequately vet the providers themselves, the researchers observe.

“All countries included in this report have strengths and weaknesses in their retirement systems,” added Brendan McCarthy, Head of Nuveen Retirement Investing. “A successful system needs to leverage the best elements of defined benefit and defined contribution plans to find a balance between the goals of adequacy, sustainability and equity.”

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