International Perspective

A] Prelude

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B] The Issue

Retirement funding looks very different depending on where you live. While the United States leans heavily on voluntary 401(k)-style savings plans, other nations rely on mandatory contributions or more traditional pensions to ensure broad coverage and steady income.

C] The Details

The CFA Institute Global Pension Index takes these structural differences into consideration when ranking some of the world’s biggest retirement systems. “We do it because we want to give a picture of the retirement landscape,” said Christine Mahoney. “We try to look at what the public systems are, what the private systems are, and look at how people will fare in retirement across all of those.

”The U.S. retirement system received a C+ rating from th CFA Institute Global Pension Index in 2024. It ranked 29 out of 48 global pension systems assessed. “It means that the system is solid, designed well, but there is a significant risk,” said Mahoney. “And if we don’t clear that risk up, the system could be in some jeopardy.

D] Changes

Countries around the world are raising their retirement ages, as well as requiring mandatory contributions into personal retirement savings, according to research from the Organisation for Economic Co-operation and Development. Experts suggest this can help address modern problems such as people living longer and fewer workers paying into the system.

“For the U.S. system, the thing that could change that grade significantly, the most important is actually coverage,” Mahoney said. “Our 401(k) plans are voluntary.” The Netherlands is frequently given a top score in the index. Mahoney says one of the key features that makes the Dutch system stand out is mandatory contributions.

E] DB versus DC

There are two broad models for retirement plans, and they function very differently:

A Defined Contribution (DC) plan, such as a 401(k) or individual retirement account, works like a bucket. Workers decide how much to put in, how to invest it and, in some cases, employers add to the bucket as well. The balance at retirement depends on contributions and investment returns, leaving the final outcome uncertain. In the United States, participation in these plans is voluntary, and workers typically must choose to opt in.
A Defined Benefit (DB) plan resembles a faucet. Programs like Social Security or employer-sponsored pensions in the U.S. promise a steady stream of income in retirement, often based on salary and years of service. It’s frequently required that the worker fund the program, either through taxes or as grounds for employment. Employers or governments manage the funding and investment risk, while retirees receive predictable monthly payments, typically for life.

F] Finally

What countries like the Netherlands and Australia do differently from the U.S. is require workers to pay into defined contribution plans. Which basically means that people are protected from their own short term view and made to invest long term.

“In the Netherlands … there’s a mandatory contribution made,” Mahoney said. “You can’t opt out of it either as an employer or as an employee. So getting money [into defined contribution accounts] in the U.S. is a real challenge because it is a voluntary system. If we’re going to stay voluntary, then getting it easier to launch a plan and join a plan is the critical thing for [the U.S.] to focus on.”

Our view is that as many families already struggle to manage their finances, it seems advisable to opt for auto-enrollment combined with a more flexible pay-out plus an opt-out option in case of illness or difficult family circumstances.