US Continues Decline in Ranking of Global Pension Index
October 26, 2015 (Business Wire) Increase in life expectancy and reduced estimate in funding available for social security cited as primary reasons for drop.
The US has continued its decline in the most recent ranking of the Melbourne Mercer Global Pension index (MMGPI), slipping from 13th place in 2014 to 14th in the 2015 index, according to Mercer, a global consulting leader in advancing health, wealth and careers, and a wholly owned subsidiary of Marsh & McLennan Companies (NYSE:MMC). This drop reflects a continuation from the 2013 ranking, where the US placed 11th among the 25 countries surveyed. Now in its seventh year, the MMGPI measured 25 retirement income systems against more than 50 indicators under the sub-indices of adequacy, sustainability and integrity.
“The US retirement system continues to rank in the middle of the pack. Concerns over the adequacy of the typical level of benefits provided under the US system contribute to our lackluster score.” said Emily Eaton, a senior consultant in Mercer’s International Consulting Group. “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 US ranking. There have been a series of regulatory changes to address these issues, but additional action could improve the adequacy and sustainability of the US system.”
Sustainability of the world’s pension systems
The 2015 MMGPI looked beyond the annual rankings to observe changes over the last seven years and assess which pension systems will continue to deliver and which ones are at risk.
“Our seven-year snapshot highlights the importance of measures such as adjusting the state pension age, increasing workforce participation amongst our ageing population, or funding additional contributions for future retirement income.” said, Dr. David Knox, Global Pension Risk Index Report Author and Senior Partner, Mercer Retirement.
Longer time spent in retirement
All of the 11 countries that have been part of the MMGPI since it began in 2009 have experienced an increase in the expected length of retirement from 2009 to 2015, with the average length rising from 16.6 years to 18.4 years.
Five countries – Australia, Germany, Japan, Singapore and the UK – have increased their pension age to offset the increase in life expectancies, but these are not enough to halt the increasing length of retirement.
The Index also looked at the average expected length of retirement in 20 years, and by this measure, three countries have witnessed a reduction. For Canada and the Netherlands, this is due to a projected increase in the state pension age from 65 to 67 during the 20 years. For the USA, life expectancy has nearly remained the same. The other eight countries in the index showed an increase.
Benefits of increasing workforce participation by older workers
For the 16 countries that have been part of the MMGPI since the 2011 report, the average labor force participation rate for 55-64 year olds has increased from 57.9% to 62.2% between 2011 and 2015, or just over 1% per year.
However, averages can be misleading. The labor force participation rate at older ages actually went backwards in the USA. In Brazil, India and China, it increased by less than 4%. “
Extending the years that individuals spend in the workforce is one of the most positive ways of developing sustainable retirement systems when life expectancies are increasing,” Dr Knox said.
“While there is a natural limit to the participation rate at older ages, with most countries still below 70%, the scope for significant increases across the world remains, which would improve the sustainability of many pension systems,” Dr Knox added.
Preventing financial strain on the next generation
The sustainability of a pension fund cannot be assessed without reviewing the level of funds set aside today to pay future retirement benefits so that the expected pension are not a financial strain on the next generation.
There is an enormous variety in the level of pension assets held ranging from 1.8% of GDP in Indonesia and 6.0% of GDP in Austria to 160.6% of GDP in the Netherlands and 168.9% of GDP in Denmark.
“The diversity in pension assets held as a percentage of GDP recognizes that some countries have very limited private pension arrangements whereas others have well-developed and mature pension systems. However, it is an important warning for all countries to prepare, prepare, prepare,” said Dr Knox.
How to improve the US retirement savings system
The MMGPI acknowledges that there is room for improvement in all countries’ retirement income systems. Suggested measures to improve the United States’ system include:
“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. However, these are the first, small steps in improving retirement adequacy for the majority of Americans. ” added Ms. Eaton.
The 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 is published by the Australian Centre for Financial Studies (ACFS) in conjunction with Mercer and is funded by the Victorian State Government.