It’s Not Perfect—but the U.S. Retirement Evolution Remains a Model for the World
I would be the first to agree the U.S. retirement system is not perfect. More Americans need access to retirement plans and those who have plans, need to save more. There is no question improvements should be made. But that doesn’t mean we need to throw the baby out with the bath water.
Far too often, critics ignore the benefits of the current system. They instead point to losses during the financial crisis when equity values plunged; overlooking the fact that account values for the majority of those who have continued to contribute now exceed the highest balances prior to the market downturn.
Some critics argue the answer is to do away with defined contribution plans and go back to defined benefit pension plans—but that oversimplified and unrealistic answer ignores the fact that global competition puts great pressures on most employers today regardless of size. In this environment, defined benefit pension plans create financial obligations on employers that, for many, are just not sustainable.
The realistic answer is to enhance the existing defined contribution/401(k) system. The U.S. needs to:
- Make it easier for employers to offer plans.
- Expand automatic enrollment and use higher default contribution rates.
- Incorporate automatic annual savings increases.
- Increase use of the “stretched match,” which encourages participants to save at a higher level in order to get the full employer match.
The U.S. retirement industry knows these concepts can help increase savings in meaningful ways. And so do other countries.
I can tell you from my meetings with government officials in Asia and Latin America over the past 25 years, the 401(k)/ defined contribution system remains the primary model many governments are studying and seeking to emulate; in part to meet the retirement needs of aging populations and in part because of the link between long-term pensions assets and economic growth.
Most recently, the Principal Financial Group® contributed to a project with the highly respected Economics School of Peking University in China which was studying retirement systems around the globe as China considers enhancing its own pension system.
The resulting report validates key components of the U.S. private employer-sponsored system, especially tax deferred retirement savings. The study included recommendations for greater use of automatic savings features, more tax incentives and enhancing the employer-based structure.
The report also reflects the potential economic benefits on the growth of the capital markets and GDP in China.
In the U.S., the build-up of 401(k) plan assets played a key role in long term capital formation during the robust 1990’s, helping to boost GDP growth. Today U.S. retirement market assets have reached nearly $18 trillion, which represents approximately 80 percent of total U.S. GDP—one of the highest asset to GDP ratios in the world.
Chile, one of the fast growing economies in Latin America, owes part of its above average economic expansion to the private pension system. The steady flow of long term pension assets is credited with 19 percent of the growth of the country’s GDP during the first 21 years of the private mandatory system. Since the beginning of the last decade, the mandatory system has been enhanced with new voluntary contributions favored by tax incentives. Today, pension funds represent nearly 61 percentof Chile’s growing GDP.
The fact that other countries are drawing from what has worked in the United States is a tremendous validation of the defined contribution system in place today.
The U.S. must continue building on that system to produce even better outcomes for a greater number of people while preserving what is working, especially current tax incentives.
The U.S. retirement system needs evolution, not revolution.
The world is watching.
Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.
t13041903at – 4/2013
 EBRI, Jack VanDerhei. As of March 31st, 2013, the majority of participants who continued contributing to the defined contribution plan had higher account balances than their account balances November 31st, 2007, just before the recession started.
 Cerulli’s 2012 US Retirement Market Update projected U.S. retirement assets at $17.7 trillion at the end of 2012.
 Internal estimation based on the results of the paper, “Macroecnomics Effects of Pension Reform in Chile”, Vittorio Corbo and Klaus
Schmidt-Hebbel, April 2003.
 Superintendency of Pensions: Valor y Rentabilidad de los Fondos de Pensiones, Diciembre 2012.
 International Monetary Fund World Economic Outlook Database, April 2013.