The fact that studies routinely show that the vast majority of Americans are not saving sufficiently for retirement is probably what makes Social Security so important to Americans, and so politically charged that politicians are loath to take on the issue.
But the value of reforms that might strengthen Social Security as a pension that middle-class retirees can rely on is perhaps easier to see through contrast with retirement systems of other nations.
That is one purpose of the Melbourne Mercer Global Pension Index, which ranks the retirement income systems of 20 countries to provide both a benchmark—e.g., is the U.S. Social Security system stronger or weaker than it was a year ago?—and highlight shortcomings and suggested reforms.
(Check out Top 10 Best Foreign Countries for Retirement: 2013 on ThinkAdvisor.)
Now in its fifth year, the study—produced by the Australian Centre for Financial Studies together with New York-based financial services consulting firm Mercer—bases its ranking on more than 50 criteria.
Its final score gives greatest weight to adequacy (including such factors and benefits and benefit design features); next most to sustainability (which includes factors such as demography and government debt to assess the system’s ability to provide benefits in the future); and last and least weight to integrity, which looks at governance issues that affect the public’s confidence in the system.
According to these criteria, top honors among international retirement systems goes to…
Overall Index Grade: 80.2
Something is right in the State of Denmark. Indeed, the Scandinavian nation also is the only one of the 20 countries studied to receive a grade of A.
Perhaps one reason Denmark is judged the world’s happiest nation in the World Happiness Report is that Danes can repose their confidence in a retirement system that the Melbourne Mercer Global Pension Index Report says “delivers good benefits, is sustainable and has a high level of integrity.”
Denmark’s index value slipped slightly from last year, but is still quite admirable. It offers a basic pension for all, a supplementary benefit for less well-off Danes and a fully funded defined contribution scheme, among other features.
Also strong is the No. 2 ranked retirement system…
2. The Netherlands
Overall Index Grade: 78.3
The lowland nation is famous for arresting leakage through its extensive system of dikes that prevent flooding. And the Melbourne Mercer Global Pension Index Report suggests that introducing a minimum age that Dutch retirees could access their funds (to reduce pre-retirement benefits leakage) would increase the Dutch system’s already high score.
The Netherlands’ retirement income system offers high levels of income replacement based heavily on employer-sponsored defined benefit (DB) plans.
That is notably different from the No. 3 ranked country…
Overall Index Grade: 77.8
The island continent’s well regarded retirement system actually improved its already high 2012 index grade of 75.7 primarily as a result of improved governance and stronger regulation.
But the features for which Australia is best known are its high mandatory employer contributions into DC plans—unlike the Dutch DB plans—consisting of funds that are managed by private financial services companies.
Employers and employees both can voluntarily contribute to these privately managed plans, and general taxes support a means-tested pension as well.
Good governance and an improving score are two qualities Australia’s system shares with…
Overall Index Grade: 73.9
The Alpine nation’s strongest point is the integrity of its retirement income system, which received an A grade. But Switzerland’s overall score was weighed down by weakness particularly in the area of sustainability.
The Melbourne Mercer Global Pension Index Report therefore includes a hike in the state pension age among its recommendations for improving the Swiss system, whose score edged up in 2013 because of an increase in net household savings.
Switzerland’s retirement payouts are related to the worker’s earnings, a feature it shares with…
Overall Index Grade: 72.6
Nordic nations have a reputation for good governance, and indeed the integrity of Sweden’s retirement income gets an A grade (like that of Switzerland, above).
Weighing down Sweden’s overall grade is its adequacy score, which the Melbourne Mercer Global Pension Index Report says can be improved by allowing and encouraging employee contributions into employer-sponsored plans and by improving tax incentives for employee contributions.
An interesting feature of Sweden’s system is a requirement that all retirement benefits from a DC plan be converted into an annuity, which is merely one of several options offered by…
Overall Index Grade: 67.9
Our northern neighbor offers various ways of receiving retirement benefits, including but not limited to annuitization.
One notable feature of its system is an age-based minimum withdrawal requirement and, depending on the type of account Canadians choose, there may be a maximum withdrawal benefit as well.
Canada’s retirement system is weak in the area of sustainability, an area it can improve on through an increase in the level of household savings.
Its minimum account withdrawal feature is something Canada shares with…
Overall Index Grade: 66.5
While Singapore requires its retirement benefit be converted to a life annuity if above a prescribed minimum, benefit amounts above a prescribed maximum need not be annuitized.
The Asian city-state allows some benefits to be withdrawn at any time for specified housing or medical expenses.
Among the Melbourne Mercer Global Pension Index Report’s recommendations are making it easier for non-residents, who comprise a third of the country’s labor force, to save for their retirement.
Singapore’s ranking is just a hair above that of…
Overall Index Grade: 66.4
Chile’s retirement system has a lot of features admired in other countries:
Retirees must convert their benefit into an annuity or programmed withdrawal product; it has a mandatory privately managed defined contribution system based on employee contributions; and employer-sponsored supplementary plans. The system also has means-tested social assistance.
The Latin American nation is weakest in the area of adequacy, which can be addressed by raising the level of mandatory contributions and increasing the retirement age.
Another country that requires conversion of the retirement benefit into a lifetime annuity is…
Overall Index Grade: 65.4
In the United Kingdom, most of the retirement benefit—typically 75%—must be converted into an annuity or drawdown product. Wealthier retirees have greater flexibility in how they receive their benefit.
The U.K. has a multilayered system with a basic public pension benefit, with some income testing determining the benefit amount; an earnings-related amount based on average lifetime salary; and voluntary private pensions.
The U.K. received a low sustainability grade of D, which could be ameliorated by increasing the labor force participation of older workers, among other factors.
Despites its faults, the overall soundness of the British system puts it well ahead of…
Overall Index Grade: 58.5
Germany’s retirement income system has good features, but it receives a grade of C because its risks and shortcomings are great enough to put its long-term sustainability into doubt.
Like the U.S., it has a pay-as-you-go rather than funded retirement system, which is risky for a country facing demographic challenges. Its sustainability sub-grade is a D, and that rating would improve were Germany to increase its older workers’ labor force participation.
The Melbourne Mercer Global Pension Index Report also recommends that Germany increase the requirement that part of the retirement benefit be taken as an annuity.
Germany is ranked just above…
The United States (No. 11) and All the Rest..:
The United States, like Germany, receives a grade of C and a slightly lower index score of 58.2.
Limiting access to retirement funds before retirement and requiring that some portion of retirement benefits be annuitized are part of Melbourne Mercer’s recommendations for the U.S.
Still, the U.S. ranked higher than Poland (No. 12), France (No. 13), Brazil (No. 14) and Mexico (No. 15), all of which received C grades, or China (No. 16), Japan (No. 17), South Korea (No. 18), India (No. 19) and Indonesia (No. 20), which received grades of D.
Some of these low grades are reflective of an early stage in the development of retirement income systems, the report suggests.
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