The provision of financial security in retirement is critical for both individuals and societies as most countries are now grappling with the social and economic effects of ageing populations. Yet, a comparison of the diverse retirement income systems around the world is not straight forward. As the OECD (2013) comments: “Retirement-income systems are diverse and often involve a number of different programmes. Classifying pension systems and different retirement-income schemes is consequentially difficult.”
Furthermore, any comparison of systems is likely to be controversial as each system has evolved from that country’s particular economic, social, cultural, political and historical circumstances. There is no perfect system that can be applied universally around the world.
However there are certain features and characteristics of retirement income systems that are likely to lead to improved financial benefits for aged individuals and households, an increased likelihood of future sustainability of the system, and a greater level of confidence and trust within the community.
With these desirable outcomes in mind, the Melbourne Mercer Global Pension Index uses three sub-indices – adequacy, sustainability and integrity – to measure each country’s retirement income system against more than 50 questions. The following diagram highlights some of the topics covered in each sub-index.
The overall index value for each country’s system represents the weighted average of the three sub-indices. The weightings used are 40 percent for the adequacy sub-index, 35 percent for the sustainability sub-index and 25 percent for the integrity sub-index. The different weightings are used to reflect the primary importance of the adequacy sub-index which represents the benefits that are currently being provided together with some important benefit design features. The sustainability sub-index has a focus on the future and measures various indicators which will influence the likelihood that the current system will be able to provide these benefits into the future. The integrity sub-index considers several items that influence the overall governance and operations of the system which affects the level of confidence that the citizens of each country have in their system.
This study of retirement income systems in 25 countries has confirmed that there is great diversity between the systems around the world with scores ranging from 43.5 for India to 82.4 for Denmark.
We believe that none of the countries in this study has an E-grade system, which would be represented by an index value below 35. A score between 35 and 50, representing a D-grade system, indicates a system that has some sound features but there exist major omissions or weaknesses. A D-grade classification may also occur in the relatively early stages of the development of a particular country’s retirement income system, such as in China, India, Indonesia and Korea.
Download the 2014 Melbourne Mercer Global Pension Index