The United States’ pension system has fallen outside of the top 10 in the world for the first time in the five years the Melbourne Mercer Global Pension Index has been released. The overall U.S. score fell slightly from 59 in 2012 to 58.2 in 2013, which resulted in the American pension system being overtaken by Singapore and Germany and falling to 11th spot.
The U.S. score fell primarily due to a reduction in the net replacement rate, a measure of the percentage of an individual’s pre-retirement income paid in retirement, as well as a measure of pension adequacy, according to Mercer.
The index showed five ways the U.S. can improve its ranking such as:
- Raising the minimum pension for low-income retirees;
- Adjusting the level of mandatory contributions for median income earners;
- Improving the vesting benefits for all plan members;
- Reducing pre-retirement leakage by further limiting the access to funds prior to retirement; and
- Requiring that part of the retirement benefit be taken as an income stream, not as a lump sum.
Denmark, the Netherlands and Australia held onto the top three positions in the index. Denmark’s well-funded pension system with its high level of assets and contributions, the provision of adequate benefits and a private pension system with developed regulations are the primary reasons for its top spot.
The index looks objectively at both the publicly funded and private components of a system, as well as personal assets and savings outside the pension system, and measures the adequacy, sustainability and integrity of a country’s pension system. The index is produced by consulting firm Mercer and the Australian Centre for Financial Studies. The index also identifies possible areas of reform for each country that would provide more adequate retirement benefits, increased sustainability and greater trust in the pension system.
The top 20 retirement systems in the world, according to the Index, are:
- South Korea
David Knox, senior partner at Mercer and author of the research, said, “As countries grapple with rising life expectancies, increased government debt, uncertain economic conditions and a global shift to defined contribution (DC) plans, there are still many lessons to be learned and new solutions to be found, particularly for the post-retirement years.”
He pointed out that a DC system is well established in many countries and it is heading this way in many others. However, he said, the problem of converting DC benefits into adequate and sustainable retirement incomes remains in many countries. “Developing effective and sustainable post-retirement solutions has to be one of the most critical challenges for policy makers and retirement industries around the globe. There has to be fundamental change in the focus from wealth accumulation to the provision of retirement income. This income must be delivered from an efficient and fair framework that is sufficiently robust to cope with the changing conditions that lie ahead,” Knox added.
The full index can be downloaded here.