The United States has continued its decline among countries’ retirement income systems ranked in the Melbourne Mercer Global Pension Index.
Mercer released the results of its 2015 index, which encompasses 25 countries with pension systems at varying stages of maturity – some systems are well established while others, particularly in the Asia, are still developing.
“The U.S. retirement system continues to rank in the middle of the pack,” Emily Eaton, a senior consultant in Mercer’s International Consulting Group, said in a statement. “Concerns over the adequacy of the typical level of benefits provided under the U.S. system contribute to our lackluster score.”
Mercer gives several suggestions on how the U.S. can improve its retirement savings system.
“The lack of employer-provided supplemental retirement benefits for many Americans, and the relatively low labor force participation rates of our older workers, are also contributing factors to the U.S. ranking,” Eaton said in a statement. “There have been a series of regulatory changes to address these issues, but additional action could improve the adequacy and sustainability of the U.S. system.”
Mercer recommends additional action — such as raising the minimum pension for low-income retirees, adjusting the level of mandatory contributions to increase the net replacement for median-income earners, reducing preretirement leakage by further limiting the access to funds before retirement, and introducing a requirement that part of the retirement benefit must be taken as an income stream — i.e., an annuity.
“The recent efforts, at both the state and national level, to introduce auto-enrollment and/or state-run individual retirement accounts, is an encouraging step in the right direction," Eaton added. "However, these are the first, small steps in improving retirement adequacy for the majority of Americans.”
In order to rank the retirement systems across the globe, the Melbourne Mercer Global Pension Index objectively evaluates both the publicly funded and private components of a system as well as personal assets and savings outside the pension system.
It measures the 25 retirement income systems against more than 50 indicators under the sub-indexes of adequacy, sustainability and integrity. From there, it gives each country a letter grade based on the country’s score – creating a global scorecard for retirement savings.
Here's what Mercer had to say about the U.S. retirement system and the 13 countries that outranked it:
The U.S. slipped from 13th place in 2014 to 14th in the 2015 index. According to the index, this drop reflects a continuation from the 2013 ranking, where the U.S. placed 11th.
Mercer describes the United States’ retirement income system as “a social security system with a progressive benefit formula based on lifetime earnings, adjusted to a current dollar basis, together with a means-tested top-up benefit; and voluntary private pensions, which may be occupational or personal.”
France’s retirement income system involves an earnings-related public pension with a minimum pension level, two mandatory occupational pension plans for blue and white collar workers respectively, and voluntary occupational plans.
Mercer describes Germany’s retirement income system as “an earnings related pay-as-you-go system based on the number of pension points earned during an individual’s career; a means-tested safety net for low-income pensioners; and supplementary pension plans which are common amongst major employers.”
According to Mercer, these plans typically either adopt a book reserving approach, with or without segregated assets, or an insured pensions approach.
Ireland’s retirement income system involves a flat-rate basic scheme and a means-tested top-up. According to Mercer, voluntary occupational pension schemes have limited coverage.
Singapore’s retirement income system is based on the Central Provident Fund (CPF), which covers all employed Singaporean residents.
“Under the CPF, some benefits are available to be withdrawn at any time for specified housing and medical expenses with other benefits preserved for retirement,” according to Mercer. “A prescribed minimum amount is required to be drawn down at retirement age in the form of a lifetime income stream.”
According to Mercer, the Singapore government announced upcoming changes to CPF for 2016 – such as providing minimum pension top-up amounts for the poorest individuals, more flexibility in drawing down retirement pension amounts and increases to certain contribution rates and interest guarantees.
The United Kingdom’s retirement income system involves a flat-rate public pension supported by an income-tested pension credit; an earnings-related pension based on revalued average lifetime salary; and voluntary private pensions, which may be occupational or personal.
“From 2016 the state flat-rate and earnings-related pension components will be replaced with a single tier state pension,” according to Mercer. “Auto enrolment is currently being phased in, requiring employers to enroll employees in pension schemes with minimum contributions (increasing to 8% in 2018), with the facility for employees to opt out.”
According to Mercer, Chile’s retirement income system involves means-tested social assistance; a mandatory privately managed defined contribution system based on employee contributions with individual accounts managed by a small number of “Administradoras de Fondos de Pensiones”; and a framework for supplementary plans sponsored by employers.
Canada’s retirement income system consists of a universal flat-rate pension, supported by a means-tested income supplement; an earnings-related pension based on revalued lifetime earnings; voluntary occupational pension schemes (many of which are defined benefit schemes); and voluntary individual retirement savings plans.
Finland’s retirement income system uses an income-tested basic state pension and a range of statutory earnings-related schemes, according to Mercer.
Mercer describes Switzerland’s retirement income system as “an earnings-related public pension with a minimum pension; a mandatory occupational pension system where the contribution rates increase with age; and voluntary pension plans which are offered by insurance companies and [authorized] banking foundations.”
Sweden’s retirement income system was reformed in 1999. The new system is an earnings-related system with notional accounts, according to Mercer.
“The overall system is in transition from a pay-as-you-go system to a funded approach,” according to Mercer. “There is also an income-tested top-up benefit which provides a minimum guaranteed pension.”
Mercer describes Australia’s retirement income system as a “means-tested age pension (paid from general government revenue); a mandatory employer contribution paid into private sector arrangements (mainly DC plans); and additional voluntary contributions from employers, employees or the self-employed paid into these private sector plans.”
The Netherlands’ retirement income system involves a flat-rate public pension and a quasi-mandatory earnings-related occupational pension linked to industrial agreements.
Most employees belong to these occupational schemes which are industry-wide defined benefit plans with the earnings measure based on lifetime average earnings, according to Mercer.
Denmark holds onto the No. 1 position for the fourth year running. According to Mercer, the primary reasons for Denmark’s top spot include its well-funded pension system with its good coverage, high level of assets and contributions, the provision of adequate benefits and a private pension system with developed regulations.
Here are the rest of the countries Mercer ranked:
15. Poland: C
16. South Africa: C
17. Brazil: C
18. Austria: C
19. Mexico: C
20. Italy: C
21. Indonesia: D
22. China: D
23. Japan: D
24. South Korea: D
25. India: D
--- Related on ThinkAdvisor: