Countries still fail to meet challenges of ageing

Australia has maintained its number three ranking in the Melbourne Mercer Global Pension Index this year, yet the report warns that retirement systems are still failing to prepare for the challenges of ageing populations and falling birth rates.

News story 26th Oct 2016

Australia has maintained its number three ranking in the Melbourne Mercer Global Pension Index this year behind Denmark and the Netherlands. Yet the report warns that countries’ retirement systems are still failing to prepare  for the challenges of ageing populations and falling birth rates.

Ageing population

Since its launch in 2009, the Index has expanded to cover about 60 percent of the world’s population, ranking 27 countries against more than 40 indicators in terms of adequacy, sustainability and public trust.

The annual Index is an ongoing joint project between Monash Business School’s Australian Centre for Financial Studies, with international consultancy group, Mercer and the Victorian Government.

Out of the 25 countries that were assessed in 2015, 19 of these countries were awarded a lower Index score this year primarily due to a drop in standards of adequacy and integrity. This resulted in an overall Index average decline of 1.5 points to 59.

The two new countries to the Index this year were Malaysia and Argentina. Argentina received the lowest ranking in the Index with a score of 37.7 coming behind Japan at 43.2.

Denmark retained the number 1 position for the fifth year in a row on a score of 80.5, followed by the Netherlands. These countries have been awarded an A rating by the Index for their “robust” systems.

Australia’s overall index value slipped due to the deferral of the rise in the Superannuation Guarantee contribution rate to 12% from 9% and a decline in the proportion of pre-retirement salary people can expect to receive in retirement. The index value fell to 77.9 down from 79.6 a year ago on  the assessment criteria of adequacy.

Underprepared for ageing populations

The 2016 report focuses on the impact of ageing populations and how each country’s retirement system is prepared for this demographic change. By 2040 it is predicted that Japan will face one retiree for every 1.44 people of working age. It also expects the old age dependency ratio will more than  treble from 2010 to 2040 for Singapore and China.

This ratio also took into account:

  • the participation rate of workers aged between 55 and 64;
  • the participation rate of workers aged 65 and over;
  • the increase in participation rate of 55-64 year olds between 2000-2015;
  • the estimated increase in retirement periods from 2015 to 2035; and
  • the amount of pension fund assets as a proportion of GDP.

Nine countries are predicted to have less than two persons of working age for every retiree by 2040. The report argues Austria, France, Germany, Italy, Japan, Korea, the Netherlands, Singapore and Switzerland need to all take action now to prepare for the consequences of an older population and the financial pressures involved.

Life expectancies from birth have increased globally during the last 40 years, by around seven to 14 years in most countries. Over this period, the increased life expectancy for a 65 year old has increased between 1.7 years in Indonesia to 8.1 years in Singapore. In Australia, life expectancy from birth has increased by around 10 years since 1970.

The report recommends that in the face of this demographic shift Australia should:

  • introduce requirements that a proportion of retirement benefits must be in the form of an income stream;
  • increase labour force participation;
  • increase the pension age; and
  • increase the minimum age to receive benefits from pension plans.

Interim Director of Monash Business School’s Centre for Financial Studies Centre, Professor Rodney Maddock says “careful planning and brave leadership from our governments” is needed.

“Australians are living longer, living larger portions of their life in retirement and spending more in retirement, so we need to be well-placed to ensure fulfilling, adequately-funded retirements.”

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By Elizabeth Byrne