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Retirement

4 retirement reforms America could borrow from other countries

By Nathan Place
September 2, 2022 3:29 PM
The Government Accountability Office has studied retirement reforms in five other countries, including the Netherlands (pictured).
Pexels/Adrien Olichon

It may not always grab headlines, but the United States is in a busy period of retirement reform. Secure 2.0 and other bills are making their way through Congress. A pandemic stimulus law bailed out hundreds of union pensions. And most recently, President Biden signed the Inflation Reduction Act, which aims to significantly reduce drug costs for seniors.

As America changes how it takes care of its retirees, it may benefit from looking at how other countries handle theirs. One federal agency, the Government Accountability Office (GAO), has done just that.

Earlier this week, GAO submitted its report on the issue to Congress. The document studies retirement plans in five other nations: the United Kingdom, Canada, Lithuania, the Netherlands and New Zealand. In particular, it found different approaches in four areas: auto-enrollment in retirement plans, financial incentives to contribute, default plan options and plan flexibilities.

In the U.S., plenty of evidence points to a need for reform. ​​Social Security will only be able to pay out 80% of its scheduled benefits by 2035, according to the program's board of trustees. In 2021, only 68% of private industry workers had access to an employer-provided retirement plan, the Bureau of Labor Statistics (BLS) found. And in 2019, one survey found that 46% of Americans had no retirement savings at all.

Though GAO took pains not to endorse any particular policy, it did find a number of interesting reforms that the U.S. could consider emulating. In fact, many of those reforms — or similar measures — are already included in the bills moving through Congress.

"This report basically shows that the U.S. is right now, with our policymakers, on the right track," said Paul Richman, chief government and political affairs officer at the Insured Retirement Institute. "Other nations… may be going a little further, which is what we're looking at doing in our own way."

Here's a look at what other countries are doing differently for their retirees:

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Auto-enrollment boosted plan participation in Quebec, Canada.
Pexels/Ola Bear

Auto-enrollment

Many U.S. employers offer 401(k)s or other retirement plans to their workers, but not all employees take advantage of them. In 2021, only 75% of private industry workers with access to an employee-provided plan actually participated in it, according to BLS data. Automatic enrollment — meaning participation is the default, unless workers opt out — may help solve that problem.

This is already an option for employers in the U.S. The difference in some countries is that auto-enrollment is not just allowed, but required. This is the case in four of the places GAO studied: Lithuania, New Zealand, the UK and Quebec (though not all of Canada). Across the board, the agency found that this boosted enrollment. In Quebec, for example, auto-enrollment led to 800,000 more participants in the city's  Voluntary Retirement Savings Plan.

"Clearly, auto-enrollment does increase participation," Richman said. "Even though workers have the option to opt out, most often they do not."

This mandate may soon come to the U.S. The House of Representatives has already passed a bill, the Securing a Strong Retirement Act, that would require employers to auto-enroll employees in the future. That bill is likely to one day be folded into the Senate's Secure 2.0 legislation, which is expected to pass by the end of the year.
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New Zealand's government matches 50% of the first NZ$1,042.86 an employee contributes to the KiwiSaver plan.
Pexels/Pixabay

Financial incentives

In addition to enrolling workers into plans, several countries also try to entice workers to stay in them through tax deductions and other incentives. GAO says this is a powerful combination.

"In our prior work, we found that combining automatic enrollment with financial incentives, such as tax preferences, helped increase retirement savings plan participation," the agency said.

New Zealand's government, for example, matches 50% of the first NZ$1,042.86 an employee contributes to the KiwiSaver plan. In Lithuania, where many workers participate in the Pension Accumulation Plan, any contribution beyond 3% of their income is tax deductible. Of course, similar incentives also exist in the U.S. — like the saver's tax credit, a rebate that rewards contributions to retirement plans. But experts say there's always room for improvement, and for new ideas.

"I think all in all, they're working," Richman said of the American incentives. "Can they be improved to work better? Yes."
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In Lithuania, the default contribution rate to retirement plans is 3%.
Pexels/Erika Žigutytė

Default contribution rates

In addition to enrollment, some countries make another aspect of their plans automatic as well: contribution rates. Workers can change these default rates if they choose to, but officials told GAO that setting a good baseline helps to make sure they save.

"The international retirement savings plans we reviewed established several default options… to facilitate employee participation and remove potential barriers to saving," the report said. These defaults exist in part "to recognize the realities of human psychology, such as procrastination, inertia, and difficulty processing complex information."

Lithuania and New Zealand, for example, set an automatic contribution rate of 3% of workers' income; in the U.K., the rate is 5%. As Richman pointed out, this feature is already common in the U.S., where almost a third of all 401(k)s now have a default rate of 6%. But some of the bills percolating in Congress would go further.

"That's where we're at right now," Richman said. "But the bills in Congress would provide for an increase in that… We support the proposals for the default rate to be increased."
Edinburgh-based Baillie Gifford has cut overall fees on some funds and introduced a two-tiered system on others that lowers charges above a certain threshold for assets under management.
The United Kingdom allows early withdrawals of retirement funds in the event of a terminal illness.
Matthew Lloyd/Bloomberg

Emergency withdrawals

GAO also investigated whether countries allow workers to withdraw their retirement savings early, during emergencies or other circumstances.

For some countries, the answer was no. The plans in Lithuania and the Netherlands simply do not allow workers to withdraw funds for non-retirement purposes. The U.K. is more permissive, allowing early disbursements in the event of a terminal illness or another "physical or mental impairment." And New Zealand is even more generous — the KiwiSaver plan lets workers withdraw funds if they're moving overseas or buying a first home.

Once again, this is something the U.S. already does to some extent. Laws passed in the wake of national disasters like hurricanes and the COVID-19 pandemic have allowed early withdrawals without penalties. 

But the country could do more — and very likely will. One of the bills making its way through the Senate, the EARN Act, would waive the tax penalty for withdrawing retirement funds early, if it's for "unforeseeable or immediate financial needs." And another Senate bill, the RISE & SHINE Act, creates something called "emergency savings accounts," which would be linked to 401(k)s but could be withdrawn from without restrictions.

"We're doing all these things already, in different ways, shapes and forms," Richman said. "Can we make improvements? We already are, in these bills."
Nathan Place
Retirement reporter, Financial Planning
Retirement Politics and policy Regulation and compliance 401(k) Social Security
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