Global pension readiness for aging populations is just average

When it comes to pension readiness to handle the financial security needs of retirees in aging nations around the world, the Netherlands and Denmark rank first and second, respectively, in the just-released Melbourne Mercer Global Pension Index 2018. The two nations recorded index scores well ahead of most other countries and were the only countries to receive an “A” grade, meaning these nations have “a first-class and robust retirement-income system that delivers good benefits, is sustainable and has a high level of integrity,” according to the report. In fact, Europe holds four of the top five spots in the index, with six nations receiving “B” grades (Finland, Sweden, Norway, Switzerland, Germany and Ireland) and no nations scoring below a “C+” (United Kingdom and France) or “C” (Spain, Poland, Austria and Italy).

In the Americas, only Chile (8th) and Canada (10th) received “B” grades, meaning the systems of these nations have a sound structure, with many good features, but also with areas for improvement that differentiate them from those receiving A grades. The United States, the largest economy in the world, ranks 19th, just behind Saudi Arabia (18th), and received a “C” grade.

But the average index score among the 34-ranked countries was 60.5, or a “C+”, with “C+” and “C” grades indicative of nations with pension systems that have some good features, but also have major risks and/or shortcomings that should be addressed. According to the index, without these improvements, the efficacy and/or long-term sustainability of the systems can be questioned.

In Asia Pacific, the highest-ranked nations are Australia (4th), Singapore (7th) and New Zealand (9th), which all received a “B” grade for their index scores. Unfortunately, the majority of Asian nations received an index score of “C” (Malaysia, Hong Kong SAR and Indonesia) or “D” (Japan, South Korea, China and India), with four of the six nations receiving a “D” located in Asia. A “D” grade denotes a system with some desirable features, but also major weaknesses and/or omissions that must be addressed or the system’s efficacy and sustainability are in doubt.

Given how many retirement income systems around the world need improvements to meet the needs of their retirees, the report suggests a number of things nations can do to aid in the long-term financial security of these programs. These are:

• Increase the state pension age and/or retirement age
• Promote higher labor force participation at older ages
• Encourage or require higher levels of private saving, both within and beyond the pension system
• Increase the compulsory/automatic coverage of employees and/or the self-employed in the private pension system
• Reduce the leakage from the retirement savings system prior to retirement
• Review the level of public pension indexation
• Improve the governance of private pension plans and introduce greater transparency