Australian pension system worsens on global index

Australia’s retirement income system has dropped to fourth place out of 34 countries rated in this year’s Melbourne Mercer Global Pension Index (MMGPI).

It now rates as B-grade with an index value of 72.6 and is described as “a system that has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A-grade system”.

Last year, Australia’s pension system was third placed with a B-plus grade and a rating of 77.1.

According to the MMGPI report, Australia’s pension value “fell significantly, primarily due to a toughening of the assets test resulting in a reduction in the net replacement rate”.

Also contributing to the decline was the inclusion of the level of household debt in this year’s ratings.

To achieve A-grade status in the index, a system needs to rank above 80. The top pensions are classified as “first class and robust retirement income systems that deliver good benefits, are sustainable and have a high level of integrity”.

The top systems this year are Denmark (80.2) and the Netherlands (80.3), both A-graded, and B-graded Finland (74.5). Each of these nations has improved its standing since last year.

Argentina’s system is ranked the lowest with a value of just 39.2 on the index. Apart from South Africa (52.7) and Saudi Arabia (58.9), no African or Middle East countries are listed, and only a few Asian ones make it on the list.

While changes to Age Pension and superannuation rules in Australia may have led to the slight decline in Australia’s retirement system, it still beats those in New Zealand (68.5), the UK (62.5) and the US (58.8).

Author of the study and senior partner at Mercer Australia Dr David Knox says that the natural starting place to having a world class pension system is ensuring the right balance between adequacy and sustainability.

“It’s a challenge that policymakers are grappling with,” says Dr Knox. “For example, a system providing very generous benefits in the short term is unlikely to be sustainable, whereas a system that is sustainable over many years could be providing very modest benefits. The question is – what’s an appropriate trade-off?”

The report recommends the index value for the Australian system could be increased by:

  • moderating the assets test on the means-tested age pension to increase the net replacement rate for average income earners
  • raising the level of household savings and reducing the level of household debt
  • introducing a requirement that part of the retirement benefit must be taken as an income stream
  • increasing the labour force participation rate at older ages as life expectancies rise
  • introducing a mechanism to increase the pension age as life expectancy continues to increase.

Do you feel your retirement income has deteriorated since last year? 

Written by Olga Galacho

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