The most sustainable pension systems in the world

The most sustainable pension systems in the world

The most sustainable pension systems in the world

The FINANCIAL -- First-pillar pension reforms introduced over the last two decades have brought about drastic changes in the global retirement landscape driven by unfavorable demographics and unsustainable, outdated or fragmented systems.

The FINANCIAL -- First-pillar pension reforms introduced over the last two decades have brought about drastic changes in the global retirement landscape driven by unfavorable demographics and unsustainable, outdated or fragmented systems. The reform process differs considerably from country to country though. The Allianz Pension Sustainability Index (PSI) analyses countries according to a range of parameters in order to arrive at a country ranking that reflects the long-term sustainability of the pension system in aging societies. This years’ updated version includes some surprising changes.

In the current study, the pension systems of Thailand, Brazil and Japan were found to be the least sustainable whereas Australia, Sweden and New Zealand lie at the other end of the spectrum. They are closely followed by Norway, the Netherlands and Denmark, according to Allianz.
 
“A good ranking in the index does not equal to generous pension payments in a country, but it shows that a country’s pension system will be able to cope with its underlying demographics. In contrast to that you have to take into account that  the countries at the low end of the ranking are there for different reasons,” said Dr. Renate Finke, author of the study.

Thailand for example has an extremely low retirement age, only sporadic coverage, and is aging rapidly. It probably postponed tackling the consequences of its aging problem after disastrous flooding and political turmoil brought other issues to the political agenda. Brazil is also aging quickly, and its pension system has a high replacement rate which, combined with early retirement options, will be unsustainable in the long run. Japan comes in at the low end of the ranking because of its very old population and very high sovereign debt level. In consideration of these factors, the pension system is still too expensive, making the need for reform an ongoing concern, according to Allianz.
 
Australia lies at the other end of the spectrum. The amount of burden a country’s pension expenditures place on public finances is a core sub-indicator in this study. Therefore, Australia’s two-tier system combining a lean public with highly developed funded pensions is under the least pressure to reform. Australia’s success is followed in order by Sweden, New Zealand, Norway and the Netherlands. The western European countries benefit from their comprehensive pension systems based on strong, funded pillars. Sweden and Norway benefited from their comparatively solid public finance situation. Norway even succeeded in surpassing the Netherlands due to its better fiscal position. Norway’s high legal retirement age and moderate aging demographic also assisted in awarding the country its high index ranking, according to Allianz.


A result which might surprise: Greece, which ranked worst in the 2011 PSI, was able to improve due to the drastic reforms stipulated by the International Monetary Fund (IMF) and European Central Bank (ECB) austerity packages. It succeeded in cutting back on pension expenditures with lasting effect. Nevertheless, the high debt level and an old-age dependency ratio well above the European average remain a challenge for the Greek system. “Greece still needs to keep an eye on its pension system as though it were watching an upper expenditure level. Surpassing this will trigger calls for further reform,” Dr. Finke said.

In the broad middle, there are many countries with very differing systems and pre-conditions: “young” countries with fragmented pension systems challenged by a rapidly aging population; and “old” countries with developed pension systems, which have initiated reforms and are aware of their challenge to monitor the financial sustainability of their old-age provisioning systems.

Many of the reforms initiated over the past couple of years were designed to lower replacement rates. Upon closer examination, however, two very different approaches begin to emerge. Countries such as the US, Australia, the UK and Ireland have developed a type of bottom-draw pension system. Here, the public pillars cover only the most basic requirements in order to prevent old-age poverty. Any additional income needed to maintain a certain standard of living must be generated through funded sources. The public pillars in continental Europe – particularly in Italy, Spain, France and Greece – take a much more generous approach.

The issue of public finances represents another sub-indicator the PSI uses in ranking countries. In 2010, the burden of Europe’s public pension systems on public finances was already 11.3 percent of GDP. In Western Europe, the burden of this expenditure is expected to amount to 12.8 percent of GDP by 2050. Similar future liabilities can be observed in Japan and Brazil. Many governments have already introduced reforms to lower pension levels, thereby decreasing the overall financial burden – particularly in the case of Greece, according to Allianz.