Current retirement systems around the world are under strain as the birth rate falls and the population ages, according to a report released in March by the CFA Institute and Mercer.
Furthermore, “although the current extent of these changes varies between countries due to local factors, the impending retirement of the baby boomers in many developed economies has highlighted the problem,” the authors wrote.
While acknowledging that no one design can answer every country’s retirement needs, the paper attempts to put forth a basic design for an ideal retirement system. Additionally, the prevailing retirement system doesn’t exist in isolation from individuals’ other resources.
The paper referred to a 1994 recommendation from the World Bank that suggested there are three tiers of a robust retirement system: a mandatory public pension; mandatory privately managed benefits; and any voluntary private benefits individuals fund themselves.
The World Bank argued in a subsequent paper that a multitier system is better able to respond to the objectives of a country’s retirement system than focusing on just one of those tiers, and is a more effective way of managing the various risks a retirement system faces over time.
“Each system must take into account that country’s particular social, economic, cultural, political and historical circumstances, including its stage of economic development, the breadth and depth of its capital markets, the current state of its pension system, as well as the balance between informal and formal labor markets,” according to the Mercer paper.
Keeping those many particulars in mind, there are 10 high-level objectives that a well-designed system must address, according to Mercer and the CFA Institute. The paper assumes retirement income comes from four possible sources: a government-funded pension to address poverty among the elderly; a mandatory system funded throughout an individual’s working years; voluntary savings specifically for retirement; and other private savings.
Here are 10 recommendations from the paper that should be incorporated into a multitiered retirement system to maximize success for the most people:
1. The government must establish clear objectives for the whole retirement system, including the complementary roles of each pillar, and incorporate the provision of a minimum income to alleviate poverty among the aged population.