The US retirement system got a disappointing grade of C+ — thanks largely to 401(k) ‘leakage,’ plan failures. Here are the A+ countries and what America can learn from them

Why the US got a C+

Mercer gave the U.S. an overall score of 60.4, with particularly weak scores in sustainability (58.4) and integrity (57.5). One of the main weaknesses identified in the U.S. retirement system is inadequate coverage, meaning many workers, especially part-time or lower-income workers, lack access to workplace retirement plans. Even with recent reforms like the Secure Act 2.0, which extended retirement plan eligibility to more workers, gaps in coverage remain.

The U.S. retirement system relies heavily on defined contribution plans, such as 401(k)s, which place the burden of saving and investing on individuals. Unlike defined benefit plans that provide guaranteed income, defined contribution plans depend on the amount an individual contributes and the performance of their investments.

Another key difference between the U.S. and countries with higher scores, Mercer said, is the U.S.’s lack of mandated annuitization, which means many retirees receive lump-sum payments instead of a steady income stream throughout retirement. This increases the risk of retirees outliving their savings, an issue less common in countries with mandatory annuities.

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The problem of 401(k) leakage

Another significant factor in the U.S. grade is known as 401(k) “leakage” — money withdrawn from retirement accounts before retirement age, often due to financial emergencies, job changes, or loans taken against the account. The Employee Benefit Research Institute says between $60 billion and $105 billion are lost annually due to early withdrawals.

Recent legislative efforts, such as provisions in the Secure Act 2.0, aim to provide penalty-free emergency withdrawals, which could make the problem worse. Experts argue that while flexibility is important, the U.S. needs stronger protections to prevent workers from raiding their retirement funds.

“Traditional defined benefit plans, once a mainstay of retirement security, continue to be replaced by defined contribution plans, shifting the burden of risk from employers to individuals,” said Margaret Franklin, president and CEO of the CFA Institute, which sponsored Mercer’s study.

“This shift has introduced a host of new challenges, including investment risk, inflation risk and longevity risk, all of which now fall squarely on the shoulders of retirees in DC plans, who often lack sufficient financial literacy.”

What other countries are doing right

Top-ranking countries like the Netherlands, Iceland and Denmark have pension systems that prioritize adequacy, sustainability and integrity — key metrics used in the Mercer report.

The Netherlands, for instance, combines a universal basic pension with mandatory occupational pensions. This ensures broad coverage and stable income for retirees. Dutch pensions are also mostly defined benefit plans, which provide guaranteed payments throughout retirement, offering more financial security than the U.S.’s defined contribution plans.

Iceland’s pension system also scores highly due to its mandatory contributions from both employers and employees. This model ensures near-universal participation and minimizes poverty risk. Iceland’s system encourages annuitization, providing retirees with consistent income for life.

Denmark, another top performer, features a combination of public and occupational pensions. A key feature is the country’s strong focus on sustainability, with pension funds required to maintain sufficient funding levels to support future retirees. Denmark also mandates pension benefits be taken as an income stream.

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What the US can learn

Mercer says the U.S. could implement several reforms modeled after these higher-ranking countries, including raising the minimum pension for low-income retirees. Another key change would reduce 401(k) leakage by further limiting early withdrawals. While provisions like those in the Secure Act 2.0 aim to give workers more flexibility, preventing access to retirement funds until retirement age could firewall an investor’s gains.

The U.S. could also expand retirement plan coverage: Although state-run auto-IRA programs and other initiatives have made progress, experts say more needs to be done at the federal level to ensure all workers have access to a retirement savings plan, especially part-time and gig economy workers.