Nations must address the inadequacy of their retirement income systems in the face of declining birth rates and a rapidly aging population, said the latest annual Melbourne Mercer Global Pension Report.
The eight annual report, the result of a study by Mercer and the Australian Centre for Financial Studies on the adequacy, sustainability and governance of the retirement income systems of 27 countries, said that most countries' life expectancies have increased between seven and 14 years over the last 40 years, with the average expectancy increasing to 78.2 years from 67.7 years.
The annual report includes the Melbourne Mercer Global Pension index, which overall dropped slightly to an average of 58.1 from 60.5, dropping the global index to a C from a C+, or as the report defines the index range of 50-60, a system that “had some good features, but also has major risks and/or shortcomings that should be addressed.”
Of the 25 countries who were part of last year's report — Argentina and Malaysia were new this year — six saw their index value increase while 19 saw their index value drop.
Denmark and the Netherlands' systems again had the highest index values as the best “first class and robust retirement income” systems, with index values of 80.5 and 80.1, respectively with an “A” rating.
The U.S. index value increased slightly to 56.4 from 56.3 the previous year. Among the improvements the report said would need to be made in the U.S. to raise its overall index value would be to increase funding for Social Security, provide incentives for delaying retirement and increasing labor force participation among older workers, and providing access to an institutional retirement plan to workers without an employer-sponsored plan.
Behind Denmark and the Netherlands, Australia had an index value of 77.9, within the 65-80 range that the report says reflects systems that have a sound structure with some areas for improvement. Also ranked within that range were Finland at 72.9, Sweden at 71.4, Switzerland at 68.6, Singapore at 67, and Canada and Chile, which both had an index value of 66.4.
Among the few countries that saw their index value increase, India's increased the most, to 43.4 in 2016 from 40.3 the previous year due to “a reduction in the net replacement rate,” the report said.
Singapore had the second greatest increase in index value, to 67 in 2016 from 64.7 the previous year, due to “an increase in the level of support provided to the poor,” the report said. South Korea had the third greatest increase, to 46 in 2016 from 43.8 the previous year, due to small increases in all three (adequacy, sustainability, integrity) sub-indexes.
Mexico saw the greatest drop in its index value in 2016 from the previous year, to 44.3 from 52.1 primarily due to “a reduction in the assumed level of support provided to the poor,” the report said.
Switzerland saw the second greatest drop from the previous year, to 68.6 from 74.2, and the U.K. had the third greatest drop, to 60.1 from 65. The report cited a reduction in the net replacement rate as the primary reason for both index value decreases.
Regarding future increases in life expectancy, whatever those are, “without changes to retirement ages and/or eligibility ages for social security and private pensions, there will be increasing pressure on our retirement systems to the detriment of the financial security provided to the older members of our societies,” the report said.