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Sustainable pension systems: do they exist?

Can pension systems be sustainable? Do they exist? So called ‘first-pillar’ pension systems around the world have been put to the test by the Allianz Pension Sustainability Index (finchannel.com, April 7, 2014).


Over the last twenty years pension reforms have been introduced in various retirement schemes globally, differing from country to country. The Pension Sustainability Index (PSI) rates the pension schemes annually across countries, particularly in terms of long term sustainability in ageing societies. A good ranking does not mean generous pension payments. Rather, it shows that a country’s pension system will be able to cope with its demographics – an aging population.

In the current 2014 study, the pension systems of Thailand, Brazil, and Japan were found to be the least sustainable. The pension schemes of Australia, Sweden, and New Zealand were the most sustainable.


Thailand, for example, states the PSI report, has an extremely low retirement age, sporadic coverage, and the population is aging rapidly. Brazil is aging quickly too, and its pension system has a high replacement rate and early retirement options, placing it unsustainable in the long term. Japan has an unsustainable pension system due to its large population of older people and high sovereign debt level.

Australia has a two-tier pension system combining a lean public finance contribution with a highly developed funded pension, which does not place a heavy burden on the government. The western European countries whose pension systems were rated highly benefit from their comprehensive pension systems based on strong, funded pillars. The Netherlands surpassed Sweden and Norway on the rating component based on the country’s solid public finance situation, but overall Sweden placed highest. Norway’s high legal retirement age and moderate aging demographic helped it reach a high index score.

The PSI noted that Greece, which ranked worst of all countries in the 2011 PSI, improved in this 2014 study due to 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, but the high debt level and old age dependency ratio well above the European average remains a challenge for the Greek system. Greece jumped from last place on the index scale in 2011 to 8th from the bottom in 2014.

The report noted two main differences in pension systems: (1) countries such as the United Kingdom, the United States, Australia, and Ireland have developed a ‘bottom-drawer’ approach in which the government pension covers only the basic requirements to prevent old-age poverty, expecting the public to ‘top-up’ their own pension scheme if they expect additional income to maintain a certain standard of living, and (2) countries such as Italy, Spain, France, and Greece have a more generous government pension approach, which is good for people, but it may place more pressure on governments long term as more people age.

The top ranked 20 countries on the PSI include: Australia, Sweden, New Zealand, Norway, the Netherlands, Denmark, Switzerland, United States, Latvia, United Kingdom, Estonia, Canada, Finland, Russian Federation, Chile, Hong Kong, Luxembourg, Lithuania, Singapore, and Mexico.


The lowest ranked 20 countries on the PSI include: Belgium, Hungary, Turkey, Portugal, Slovak Republic, Indonesia, Taiwan, France, Italy, Spain, Cyprus, South Africa, Greece, Malta, China, Slovenia, India, Japan, Brazil, and Thailand.

http://projectm-online.com/research


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