Thought Leadership in Action

While the retirement systems in the United States, the United Kingdom, and Australia differ in important ways, all are falling short to varying degrees in ensuring that workers in those countries are adequately preparing for retirement, according to an article published by human resources consultancy Findley Davies in its November/December 2017 newsletter.

Retirement Readiness

The article, "Retirement Readiness—How Do We Compare?" was written by Ken Hohman, an actuary and management consultant. Hohman presented a comparison of the retirement systems in these three countries based on his involvement on behalf of the American Academy of Actuaries with a project in collaboration with the Actuaries Institute in Australia and the Institute and Faculty of Actuaries in the UK.

Hohman observed that Australia, the UK, and the U.S. have similar but significantly different retirement systems. Specifically, he explained, each country has a national social security system that is weighted in favor of lower-income individuals, but the degree of weighting varies greatly among the systems. He also pointed out that each country has employer-based retirement plans, but that these range from mandatory plans with significant mandatory contributions (Australia), to mandatory auto-enrollment plans with the ability for an individual to opt out (UK), to voluntary plans with voluntary auto-enrollment (U.S.). Moreover, he noted, each country offers voluntary tax-favored options for personal savings.

In the article, Hohman reported on the results of a survey the project conducted of nearly 3,000 working-aged individuals (ages 18-64) divided among the three countries that looked at three main topics: the retirement transformation, preparing for retirement, and the ability to address retirement risks. He noted that the survey findings suggest that the perceptions of what retirement is have clearly changed in the years since the financial crisis of 2008, with workers today saying they expect to retire later and with lower expectations. The survey found, for example, that 30% of respondents said they have no thought of ever retiring; and that of the 70% who do plan to retire, 73% indicated that they plan to retire gradually.

According to Hohman, the most meaningful finding of the survey is that an average of only 42% of respondents expect to have a comfortable retirement, with respondents in the UK (36%) lagging well behind those in Australia (46%) and the U.S. (47%) in anticipated retirement lifestyle. "This raises the question of whether those living in the UK are less prepared for retirement or simply more honest in their long-term outlook," he said.

The survey used four criteria to determine whether respondents are preparing appropriately for retirement: whether they are seeking out ways to educate themselves regarding retirement savings and risks; whether they have already started saving for retirement; whether they know how much income they will require in retirement, and how much they will have accumulated at retirement; and whether they have planned for an unanticipated early cessation of work due to events such as job loss or ill health. The average of these four criteria indicated that 48% of U.S. respondents and 43% of Australians are reasonably prepared, compared to 35% of respondents in the UK, who were shown to lag behind in all four criteria.

The survey findings also showed that retirement preparation increases with age and income, and that men are more likely to be prepared than women. The average retirement preparation score was 47% for men and 34% for women; and the gender gap was greatest in Australia, at 54% for males and 32% for females.

In addition, the survey respondents were asked about the degree to which they have anticipated five specific post-retirement risks: how long their savings will have to last; whether they have a plan for how they will spend down their retirement assets; whether they have planned for living longer than expected; what they will do if they experience a significant loss in their retirement assets; and whether they have planned for the risk of chronic ill health.

The results showed that little more than half (56%) of the respondents indicate they have taken steps to address these five retirement risks. Hohman observed that the average score by country shows the familiar pattern of stronger preparation in the U.S. (63%) and Australia (61%) relative to the UK (48%), and that this average is driven by the finding that 77% believe they have appropriately planned for a drop in their retirement assets. He cautioned, however, that the vast majority of these respondents indicated that their "plan" for this contingency is to go back to work.

Commenting on these findings, Hohman said that "it is obvious that all three countries have done a good job educating workers about retirement saving and getting them to actually start saving, but all three have failed to help people understand the amount of savings needed or to recognize the risk that events could intercede to shorten the savings horizon."