What You Need to Know
- Mercer and the CFA Institute released their latest grades on global pension systems.
- The United States' Social Security system got a C+.
- Almost universally, women received less in pensions than men; Japan had the largest gender gap.
In their paper, Pension Reform in Challenging Times, Mercer and the CFA Institute compared 43 government retirement systems (often call pensions outside the U.S.) and graded each country.
This year is especially important as the effects from the pandemic, the paper notes, “with reduced wage growth, historically low interest rates and reduced investment returns in many asset classes, are placing additional financial pressures on existing retirement income systems.”
Using its Mercer CFA Institute Global Pension Index, each country’s system is graded using three sub-indexes, measuring adequacy, sustainability and integrity. Mercer/CFA Institute acknowledges the various systems can be expansive and different.
David Knox, senior partner of Mercer, notes in the paper that the grade indicates:
- What benefits are future retirees likely to receive?
- Can the existing systems continue to deliver, notwithstanding the demographic and economic pressures?
- Are the systems well-governed to encourage long-term community confidence?
This year’s report also takes into consideration for the first time gender differences in pension outcomes, and found that “the average female pension is lower, and in some situations, much lower than the average male pension.”
The report states that this gap can be due to three broad areas: employment, pension design and socio-cultural issues. Of 34 selected Organization for Economic Cooperation and Development countries, the most extreme gap was in Japan, followed by Mexico, Austria, the United Kingdom and Luxembourg. The United States had the seventh-largest gender gap.
The smallest gender gaps were in Estonia, Denmark, Slovak Republic, Iceland and the Czech Republic.
The three sub-indexes that make up the overall index cover certain areas that have different weights:
Adequacy (40%): benefits, system design, savings, government support, homeownership, growth assets
Sustainability (35%): pension coverage, total assets, demography, public expenditure, government debt, economic growth
Integrity (25%): regulation, governance, protection, communication, operating costs
Here are the grades, index level and countries:
A first-class retirement income system that delivers good benefits, is sustainable and has a high level of integrity.
Index Value >80
Countries: Iceland, Netherlands, Denmark
Index value: 75-80
Countries: Israel, Norway, Australia