Americans have to rely on themselves, also when it comes to pension

Published on: 20 January 2022

The second-best pension system in the world. That's what we have in the Netherlands, according to the annually published Mercer CFA Institute Global Pension Index, in which 43 countries are included. Are the other countries really performing that poorly? Every two weeks and during twenty weeks, we delve into the system of a specific country. We cross the ocean for episode six, to the country of unlimited possibilities: America.

America – 19th on the Mercer ranking with 43 countries - is known as a country where a good social safety net and good health insurance are not taken for granted. The more you can afford, the more you have to fall back on. The more (entrepreneurial) risk you are willing to take, the more benefits are to be reaped in a financial sense. That is to say: as long as you succeed. Because Americans who are less financially successful, appear to be getting a rough deal. And that mentality is also to be found in the American pension system. Have you not or hardly accrued any pension, an old age in poverty awaits which cannot be compared to what we consider poverty in the Netherlands.


A reasonably sustainable system with an on average inadequate pension. That's the picture of the US, as portrayed by the scores in the Mercer Index. Every American who has worked for approximately ten years is entitled to Social Security, the government pension, in his or her old age. The average amount is 1540 dollar per month (18,500 dollar per year). The payment depends on the salary earned during your working life and the contribution paid, and amounts to a maximum of 3113 dollar (2733 euro) per month. There is no minimum benefit level. Only when you reach the pensionable age, the full benefits will be paid. In 2022 that age is 67 years old for people who are 62 years old or younger at that time. You are allowed to make a claim to Social Security at the age of 62, but then you will receive less (maximum 2324 dollar, or 2040 euro). Do you have an average income? Only half of that amount will be paid as pension in the US.

The Social Security system is progressive: participants with a high income receive a smaller part than participants with a low income. An American earning three times the average, does not even get paid 29 percent of that Social Security system as pension from the government. This means that the more you earn, the more you have to arrange yourself - for example by participating in the pension scheme of your employer - to avoid a massive decrease in income upon retirement. On average, the pension in America is 40 percent of the earned salary.

No mandatory participation

Approximately half of the employees in the American private sector participate in a pension scheme that's partly paid by the employer (in comparison: only one out of ten employees does not accrue any supplementary pension in the Netherlands). The US, contrary to the Netherlands, does not have mandatory participation in a pension scheme when you enter into service at a certain company. Periodic payment of pension therefore is no automatism, but something you choose consciously, although increasingly more auto-enrolment takes place (meaning you participate in the pension scheme automatically, unless you opt out).

These schemes usually entail a so-called defined contribution scheme. For these types of pension provisions, the contribution is a fixed amount but your pension payment is highly dependent on the performance of the stock exchange at the time of retirement. This is contrary to defined benefit pension schemes that offer way more security on the payment amounts upon retirement.

Short time of enjoyment
In the public sector (the government), all employees participate in a pension scheme that's partly paid by the employer. This is arranged by each state separately. It mainly concerns defined benefit funds but it currently is a trend to introduce defined contribution elements.

Although the US is the largest pension market in the world in terms of managed assets, the coverage ratio of the pension funds is much lower than in the Netherlands. And they also use a more favorable calculation method, according to Rob Bauer, Professor Institutional Investors at the University of Maastricht, in a previous article on The largest pension fund of America has a coverage ratio of approximately 70 percent. However, that coverage ratio would only be 30 percent should it be calculated based on the Dutch legislation.

Americans only have a relative short time to enjoy their pension: men for 16.4 years and women 19.8 years. The replacement rate is 70 percent which is comparable with the Netherlands (71 percent).

Insolvent funds

The pension funds in the US also don't shy away from taking risks and the American legislation provides these funds with plenty of room to take those risks. With disastrous consequences if things don't go as planned. American history shows quite some cases of pension funds going bankrupt, with an overrepresentation in the funds of airlines. The fund of United Airlines for example in 2005, with an outstanding amount in liabilities of 7.4 billion dollar, or US Airways in 2003 (2.8 billion dollar).

The American pension system:         Facts & Figures

Valuation in the Mercer CFA Institute Global Pension Index 2021: C-Grade, in this case C+ (C-Grade means “a system with some good features, but also major risks and shortcomings. If these issues are not addressed, the question is whether the system will be tenable and adequate in the long term.”)

  Based on pay-as-you-go (first pillar) and capital funding (second pillar)

Adequacy (Mercer ranking):                   

Durability (Mercer ranking):                    10th

Integrity (Mercer ranking):                      37th










Net pension







Net replacement rate







Total net pension assets upon retirement








Explanation table:

The column ‘1’ represents the situation for someone with the average net income. The column ‘0.5’ displays the situation of someone with half the average net income, et cetera.

Net pension: the net pension someone receives as a percentage of the net average income.

Net replacement ratio: the net pension remaining, expressed in a percentage of the total wage of the individual concerned.

Total net pension assets: value of the anticipated payments as a multiple of net annual income.