In early June, the Organization For Economic Cooperation and Development (OECD)--the club of the world's wealthy and almost wealthy nations--released a 208-page document perversely titled Pensions at a Glance. Inside is a rundown of how generous OECD members are to their burgeoning ranks of retirees.
The U.S. is near the bottom, with the average wage earner able to count on a government-mandated pension for just 52.4% of what he got (after taxes) in his working days--and higher-income workers even less. But the picture at the other end of the scale (dominated by Continental Europe) is misleading. Most of these governments haven't put aside money for pensions. As the ranks of retirees grow and workforces do not, countries will have to either renege on commitments or tax the hides off future workers.
What the OECD data seem to suggest is that you can run a retirement plan that's fiscally sound but stingy, or you can make big promises that will eventually go sour. The U.S. fits mostly in the former category--for all the gnashing of teeth about Social Security, its funding problems are modest by global standards.
But is that really the choice? Actually, no. At least one country appears to have found a better way. In the Netherlands--"the globe's No. 1 pensions country," says influential retirement-plan consultant Keith Ambachtsheer--the average retiree can count on a pension equal to 96.8% of his working income. Ample money is set aside to fund pensions, and it is invested prudently but not timidly. Companies contribute to employees' accounts but aren't stuck with profit-killing obligations if their business shrinks or the stock market tanks.
The Dutch have steered a middle way between irresponsible Continental generosity and practical Anglo-American stinginess. They have also, to lapse into pension jargon, split the difference between DB and DC plans. In a defined-benefit (DB) plan, workers are promised a retirement income, and the sponsor--usually a corporation or government--is on the hook to provide it. In a defined-contribution (DC) plan, the worker and sometimes the employer set aside money and hope it will be enough.
The big problem with DB is that sponsors are prone to lowball or ignore the true cost. In the U.S., where corporate pensions provide a key supplement to Social Security, Congress has felt the need to pass multiple laws aimed at preventing companies from underfunding them. In response, some companies spent billions shoring up their funds; many others simply stopped offering pensions. Just since 2004, at least 66 big companies have frozen or terminated their DB plans, estimates Barclays Global Investors. Corporate DB has given way to individual DC plans like the 401(k) and IRA. But these put too much responsibility on the shoulders of individual workers. Many don't save enough money, and those who do set aside enough earn returns that are on average much lower than those of pension funds.
The Netherlands, like the U.S., has long relied on workplace pensions to supplement its government plan. The crucial difference is that these pensions were mandatory. Smaller employers had to band together to make a go of it, and industry-wide funds became standard. Run more as independent cooperatives than as captive corporate divisions, the Dutch funds were less prone to underfunding than their U.S. counterparts. When they nonetheless ran into financial trouble in 2002 after the stock market crashed and interest rates sank, the country came up with a unique response. The Dutch funds are now no longer on the hook for providing a set income in retirement no matter what happens to financial markets--that is, they've gone DC--but they didn't shunt everything to individual workers. Risks are shared by all the members of a pension fund, and the money is managed by professionals.
Pension consultant Ambachtsheer argues that this "collective DC" is just what the U.S. needs. Many companies here are improving 401(k)s to give employees more guidance, and there's talk in Washington of supplementing (not supplanting) Social Security with near mandatory retirement accounts. But even those changes would fall well short of going Dutch. UNREALISTIC EXPECTATIONS Countries don't always set aside enough money to pay for the pensions they promise [This article contains a chart. Please see hardcopy of magazine.]