Australia has slipped from third to fourth position in the newly released Mercer Global Pension Index for 2018, a survey widely considered the most comprehensive overview of global pension systems.
The study of 34 retirement income systems around the world ranks them by three broad measures – adequacy, sustainability and integrity. Aggregate scores, the weighted average of these, ranged from 39.2 for Argentina, at the bottom, to 80.3 for the Netherlands, at the top.
Netherlands and Denmark are the only countries which Mercer attributes ‘A’ grade rankings, which implies an index value of 80 or above. Australia, which now ranks fourth after Finland, is in the ‘B’ grade category with scores from 65-75. (No country is in the ‘B+’ category of 75-80).
What’s dragging Australia down is the adequacy of our system, where we score just a ‘C+’ as opposed to an ‘A’ for integrity. In fact, the decline in our overall score from 77.1 in 2017 to 72.6 this year was almost entirely due to a markdown in the adequacy measure.
“The Australian index value fell significantly primarily due to a toughening of the assets test resulting in a reduction in the net replacement rate and the inclusion of the level of household debt as part of the adequacy sub-index,” Mercer explains.
It suggests the following changes for Australia:
Moderate the asset test on the means-tested age pension to increase the net replacement rate for average income earners
Raise the level of household saving and reduce the level of household debt
Introduce a requirement that part of the retirement benefit must be taken as an income stream
Increase the labour force participation rate for older groups as life expectancies rise
Introduce a mechanism to increase the pension age as life expectancies rise
For more information on the index, including the full report, click here.