America’s pension system has fallen outside of the top ten in the world for the first time in the five years the Melbourne Mercer Global Pension Index has been evaluating retirement systems around the world. America’s overall score fell slightly from 59.0 in 2012 to 58.2 in 2013, which resulted in the American pension system being overtaken by Singapore and Germany and falling to eleventh spot.
America’s score fell primarily due to a reduction in the net replacement rate, which is a measure of the percentage of an individual’s pre-retirement income paid in retirement. This represents an important measure of pension adequacy.
The report recommended five key steps to improve the US retirement system ranking:
- Raising the minimum pension for low-income retirees
- Adjusting the level of mandatory contributions for median income earners
- Improving the vesting benefits for all plan members
- Reducing pre-retirement leakage by further limiting the access to funds prior to retirement
- Requiring that part of the retirement benefit be taken as an income stream, not as a lump sum
Denmark, the Netherlands and Australia held onto the top three positions in the Index. Denmark, who became the first country to achieve an ‘A’ Grade in 2012 held onto the position in 2013 despite their overall score falling to 80.2 from 82.9. Denmark’s well-funded pension system with its high level of assets and contributions, the provision of adequate benefits and a private pension system with developed regulations are the primary reasons for its top spot.
The Melbourne Mercer Global Pension Index is now in its fifth year and has increased from 11 countries in 2009 to 20 countries in 2013, with Mexico and Indonesia the latest additions. It now covers more than 55% of the world’s population. The Index looks objectively at both the publicly funded and private components of a system as well as personal assets and savings outside the pension system. It measures the adequacy, sustainability and integrity of a country’s pension system and is produced by Mercer and the Australian Centre for Financial Studies and is funded by the Victorian State Government.
The research identifies possible areas of reform for each country that would provide more adequate retirement benefits, increased sustainability, and greater trust in the pension system. Suggested measures to improve America’s system include:
- Raising the minimum pension for low-income pensioners
- Adjusting the level of mandatory contributions to increase the net replacement rate for median income earners
- Improving the vesting of benefits for all plan members and maintaining the real value of retained benefits through to retirement
- Reducing pre-retirement leakage by further limiting the access to funds before retirement
- Introducing a requirement that part of the retirement benefit must be taken as an income stream
The 2013 Index includes a special chapter on post-retirement solutions in a defined contribution (DC) world.
Professor Deborah Ralston, Executive Director of the Australian Centre for Financial Studies said the global response to the Index continues to indicate its value to government, industry and academia as they debate how best to provide for an ageing population.
“As more countries are included in our analysis, it better highlights the fact that the US retirement system does not rank in the top 10 in the world,” said Scott Pollack, consultant in Mercer’s Retirement business. “Americans continue to struggle to achieve adequate income in retirement. That, coupled with proactivity on the part of other nations to address similar retirement challenges, has resulted in other nations overtaking the US in our latest index.”
Dr David Knox, Senior Partner at Mercer and author of the research, said “As countries grapple with rising life expectancies, increased government debt, uncertain economic conditions and a global shift to defined contribution (DC) plans, there are still many lessons to be learnt and new solutions to be found, particularly for the post-retirement years.”
“A DC system is well established in many countries and it is clearly heading this way in many others. Australia has arguably been a trail blazer in terms of adopting a DC system. However, the conversion of DC benefits into adequate and sustainable retirement incomes remains a largely unresolved problem in many countries, including Australia.
“Developing effective and sustainable post-retirement solutions has to be one of the most critical challenges for policy makers and retirement industries around the globe.
“There has to be fundamental change in the focus from wealth accumulation to the provision of retirement income. This income must be delivered from an efficient and fair framework that is sufficiently robust to cope with the changing conditions that lie ahead,” said Dr Knox.
“Many of the challenges relating to ageing populations are similar, irrespective of each country’s social, political, historical or economic influences. Many of the desirable policy reforms to alleviate these challenges are also similar and the Index aims to highlight the best solutions and share them globally,” said Professor Ralston.
The full 2013 Melbourne Mercer Global Pension Index analysis in PDF format is available at http://www.mercer.com/global-pension-index-pdf
Country Ranking – 2013 Melbourne Mercer Global Pension Index
- South Korea
About the Australian Centre for Financial Studies
The Australian Centre for Financial Studies (ACFS) is a not-for-profit consortium of Monash University, RMIT University and Finsia (Financial Services Institute of Australasia) which was established in 2005 with seed funding from the Victorian Government.
The mission of the ACFS is to build links between academics, practitioners and government in the finance community to enhance research, practice, education and the reputation of Australia's financial institutions and universities, and of Australia as a financial centre. ACFS conducts leading edge finance research, commentary and thought leadership. More information can be found at www.australiancentre.com.au and on the Index www.globalpensionindex.com.
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 42 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 52,000 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. For more information, visit www.mercer.com.au.