Which countries have made investments in robust public pension systems, and which are lagging?
The quality of pension systems available to workers differs widely around the world. The Mercer CFA Institute Global Pension Index 2021 compares 43 retirement income schemes around the globe, identifying strengths and weaknesses. Iceland, a recent entry, is recognized in 2021 as having the best pension system worldwide, while the U.S. doesn't rank at the top of the list.
In this article, we'll analyze the results of data from the 2021 Mercer CFA Institute Global Pension Index, representing more than two-thirds of the world’s population.
How does the Index rank the pension systems?
Each country has its unique pension system based on its particular economic and historical context, so it’s challenging to draw direct comparisons. However, pension experts consider some aspects universally positive that lead to better financial support for older citizens.
The Mercer CFA Institute Global Pension Index is sponsored by CFA and is published in cooperation with the Monash Center for Financial Studies (MCFs) and global consultants Mercer. The Index compares 43 retirement income systems, covering a broad range of pension systems and policies, and suggests ways each system needs to improve retirement benefits.
The index data is calculated using the weighted average age of three subindices. The average sub-index score for all 43 countries is 66.7 for adequacy, 69.7 for integrity, and 50.4 for sustainability.
Adequacy sub-index (40%)
The adequacy sub-index makes up 40% of the overall index value of a country and also analyzes how the country’s pension systems benefit the poor and a variety of income earners. Furthermore, the adequacy sub-index measure looks at the efficacy of pension systems, household countries' savings, and homeownership rates.
Integrity sub-index (25%)
The integrity sub-index represents 25% of the country’s overall index score. The sub-index considers the cost of communication, governance, regulation, and control of pension systems and policies in that country. It also examines the quality of the country’s private sector pension because, without the private sector, the government is the only pension provider.
The sustainability sub-index comprises 35% of the country’s overall index value. It considers factors such as the level of coverage of private pension plans, economic growth, and government debt to examine the sustainability of the country’s retirement fund system.
Top 3 countries with the best retirement systems
The Index compares the country’s retirement income system and rates depending on its adequacy, integrity, and sustainability subindices. Each country has index values ranging from 0 to 100, with higher values representing more encouraging pensions and retirement systems.
The top countries with the highest overall grade index are:
- Iceland
Grade: A
Over-all index value: 84.2
Adequacy sub-index: 82.7
Integrity sub-index: 86.0
Sustainability sub-index: 84.0
Iceland is included in the Index for the first time, taking the top position from the Netherlands, having an overall index value of 84.2. It ranks highest across all three sub-indices and highest for adequacy and sustainability among the 43 retirement systems. However, its integrity sub-index ranks lower in the 7th position.
Iceland has the highest pension in the world. The country’s retirement system offers the best state pension in Europe with two components; mandatory contributions from employees and employers and optional contributions to government-approved pension products.
Its retirement system has the highest contribution rate, leading to a generous state pension from which retirees in Iceland can benefit.
Iceland has a comparatively low gender pension gap, which means that the difference between the average pensions for men and women is relatively minimal especially compared to other OECD nations.
Iceland’s retirement system can further be improved by increasing the pension age to keep up with rising life expectancy.
- Netherlands
Grade: A
Over-all index value: 83.5
Adequacy sub-index: 82.3
Integrity sub-index: 87.9
Sustainability sub-index: 81.6
The Netherlands held the top position according to overall index value in 2020. But in 2021, with an index value of 83.5, the Netherlands ranked No 2. The retirement system of the Netherlands consists of a flat-rate public pension and a semi-mandatory earnings-related occupational pension associated with industrial agreements.
Most of the Netherlands’ workers are members of these occupational plans, which are industry-wide benefit plans. Earnings depend on a lifetime average.
The country can improve its retirement system by increasing the level of household savings and decreasing the level of household debt.
- Denmark
Grade: A
Over-all index value: 82
Adequacy sub-index: 81.1
Integrity sub-index: 81.4
Sustainability sub-index: 83.5
With an overall index value of 82, Denmark ranked No. 3 among 43 countries.
Denmark's retirement system is multi-faceted, consisting of a fully funded defined-contribution plan, a supplementary pension benefit linked to income, a public pension scheme, and mandatory occupational programs.
Denmark's score can be improved, according to the Index, by:
- Raising household savings and decreasing debt
- Introducing measures to safeguard both spouses' interests in a divorce
- An increase in elder employees' participation in the labor force as life expectancy increases
Where did the U.S. rank in the list?
Here’s how the U.S ranked among 43 countries.
Grade: D
Over-all index value: 61.4
Adequacy sub-index: 60.9
Integrity sub-index: 59.2
Sustainability sub-index: 63.6
The U.S. retirement system includes social security, employer-sponsored pensions, retirement savings plan, and individual savings.
The United States may improve its retirement system by further limiting access to money before retirement can help prevent pre-retirement leakage.
The Bottom line:
The Mercer CFA Institute Global Pension Index offers suggestions for improving the retirement-income systems in each country and acknowledging the lack of a single, universally applicable solution because each system has developed from particular economic, political, social, and historical circumstances.
The common challenges for pension systems worldwide are increasing the average retirement age to meet rising life expectancy, promoting more savings, and increasing access to private pensions for self-employed people.
The accessibility of money before retirement should be limited, and transparency should be increased in all pension systems worldwide.
