America's Retirement System Is Too Inconsistent

Only 40.8% of the U.S. working-age population is covered by voluntary workplace pension or retirement-savings plans, according to the OECD. Another 19.3% have voluntary personal retirement accounts, but there's overlap between the two groups. The mandatory pension plan, Social Security, replaces a relatively low percentage of earnings (38.3% for those with average incomes, compared with an OECD average of 52.9 percent). And while this country's remaining defined-benefit pension plans are as a rule pretty generous, they are also as a rule underfunded, with an average funding ratio of 67.5 percent, compared with 88.7% in the U.K., 95% in Canada and 102.2% in the Netherlands.

One simple measure of the haphazardness of the U.S. system is this: The average income of those 66 and older here is, at 94.5% of the average income for the total population, above the OECD average of 87.6 percent. But the percentage of Americans 66 and older earning less than half the average income for the total population is, at 20.9 percent, way above the OECD average of 12.5 percent. We have a system of retirement savings that on the whole seems to exacerbate inequality rather than ease it.So that's a shame, and I've grumbled about the flaws of the U.S. retirement system before. But when one looks at it in context (maybe "Pensions in Context" would be a more accurate name for the OECD report?), the U.S. situation actually seems relatively promising. That's because:

Social Security isn't very generous by international standards, which means it's also relatively cheap, with payments adding up to 7% of gross domestic product in 2013, compared with an OECD average of 8.2 percent. Fixing its looming funding shortfalls won't be nearly as painful as in, say, Italy, where public pension payments account for 16.3% of GDP. The U.S. has shown that it's capable of putting aside lots of money for retirement, if not necessarily in the most efficient or fair manner. Americans have also shown that they're willing to work longer, with 31% of those aged 65 through 69 employed, compared with an OECD average of 20.9 percent. The U.S. isn't aging as fast as other rich countries (and some not-so-rich countries).

To back up that third point, think about old-age dependency ratios now and in the projected future, for OECD countries and some others. I've included a couple of non-OECD countries (Brazil and China) because the data's available and because it's interesting:

In lots of other affluent countries (and some not-so-affluent ones), it's hard to envision anything other than reductions in retirement benefits down the road. The United States, though, may actually be in a position to improve its overall retirement-income picture. Big employers have already made a lot of improvements in workplace 401(k) programs over the past few years; what's been missing are good options for those with substandard workplace plans or none at all.

Also generally missing are arrangements that encourage Americans to share longevity risk (which is what traditional pensions do) rather than everybody having to save enough money to make it to 105. Tellingly, Americans 65 to 74 are much better off relative to the OECD norm than those 75 and older.

So the U.S. has a flawed retirement-income system. But its flaws seem eminently fixable, which is better than a lot of countries can say.

— For more columns from Bloomberg View, visit http://www.bloomberg.com/view.