Source: Mercer. Where various countries stand on the MMGPI.
Now in its eighth year, the Melbourne Mercer Global Pension Index (MMGPI) urges governments worldwide to act quickly to address aging populations, declining birth rates, and inadequate retirement systems. This year, the MMGPI examined the effects of rapidly aging populations and how prepared countries’ retirement systems are to handle the significant financial strains this presents.
Dr. David Knox, the report’s author and a Senior Partner at Mercer, noted that many governments and communities have underestimated the combined effects of longer lifespans and falling global birth rates.
He stated, “This year’s report features a projected old-age dependency ratio that will be alarming in many regions. By 2040, the ratio is predicted to vary significantly, with one retiree for every seven working-age people in South Africa, compared to one retiree for every 1.44 working-age people in Japan.”
Dr. Knox emphasized that regardless of a country’s size or current MMGPI ranking, enacting policy changes is crucial to withstand future difficulties posed by the world’s aging population.
According to Professor Rodney Maddock of the Australian Centre for Financial Studies, “We are living longer, spending more years in retirement, and requiring more financial resources during this time. Therefore, we need to be well-prepared to ensure fulfilling and adequately funded retirements.”
The MMGPI compares each country’s old-age dependency ratio in relation to five key factors:
- The labor force participation rate of older workers aged 55 to 64
- The labor force participation rate of older workers aged 65 and over
- The increase in the labor force participation rate of 55 to 64-year-olds from 2000 to 2015, which shows whether more people are working at older ages in that country.
- The projected increase in the retirement period from 2015 to 2035, considering expected increases in life expectancy and the projected increase in the normal eligibility age for social security or publicly funded pensions
- The level of pension fund assets in each country, expressed as a percentage of GDP
Although these indicators are not flawless, Dr. Knox believes they reflect trends that affect retirement benefits’ long-term viability and public trust.
The graph below illustrates each country’s relative position in terms of both the predicted old-age dependency ratio and the five mitigating factors.
“Indonesia is an intriguing case, with its relatively low old-age dependency balanced by a comparatively high labor force at older ages and a significant increase in the retirement age,” Dr. Knox observed.
In the past 40 years, life expectancies at birth have risen by 7 to 14 years in most nations. More importantly, the increase in life expectancy for a 65-year-old during the past 40 years has ranged from 1.7 years in Indonesia to 8.1 years in Singapore.
Dr. Knox cautioned, “Without adjustments to retirement ages and eligibility ages for social security and private pensions, global retirement systems will face growing pressure, jeopardizing the financial security of our society’s senior members.”
Singapore maintains its top spot in Asia for the fourth year in a row, placing seventh globally, with a significant improvement in both adequacy and sustainability scores. According to Mercer, the increase in Singapore’s score can be attributed to increased government financial assistance for the poor, as well as increased pension assets and labor force participation among older people.
Singapore’s overall score improved from 64.7 in 2015 to 67.0 in 2016, bringing it closer to the ‘A’ grade, which is given to pension systems with scores above 80. “While Singapore’s retirement income system remains amongst the best in Asia and saw a significant improvement in score from 2015, we are not yet the best globally. Creating incentives for corporate retirement plans, opening CPF* to non-residents, and continuing to increase the labor force participation rate as life expectancies rise, will improve Singapore’s score in the future,” said Neil Narale, Singapore Mercer Marsh Benefits Leader for Mercer.
“However, Singapore is on the right track, having implemented enhanced guaranteed investment returns for older members and the introduction of the Silver Support Scheme to help low-income retirees in 2016.”
The MMGPI recognizes that there is room for improvement in the retirement income systems of all countries. Measures that could help Singapore’s system even more include:
- Reducing the obstacles to establishing tax-approved group corporate retirement plans
- Making CPF available to non-residents (who make up more than a third of the workforce)
- Increasing labor force participation rates among older workers as life expectancies rise
- Boosting exposure to growth assets
“Employers continue to be interested in sponsoring a corporate retirement plan. Policies that create incentives to promote employer participation would further increase Singapore’s grade in the future,” said Narale. “In addition, the recently announced CPF Lifetime Retirement Investment Scheme is a welcome addition to CPF, which should improve exposure to growth assets in the future.”
This year’s MMGPI, the world’s most comprehensive comparison of global pension systems, covered nearly 60% of the global population. It assessed 27 systems against more than 40 indicators to determine their adequacy, sustainability, and integrity. It encompassed a wide range of countries from the Americas, Europe, and Asia-Pacific regions, including Malaysia and Argentina for the first time.
The Index, which is supported by the Victorian Government and draws on the best minds in Australia’s financial services and research expertise, is a testament to Victoria’s dominance in the superannuation* and financial services industries.
“Victoria continues to lead the way in funds management, a critical component of any superannuation and annuities system, thanks to a robust financial services sector and a deep talent pool,” said Victorian State Minister for Industry and Employment, Wade Noonan.
“The Victorian Government is working closely with the financial services sector through our Future Industries Fund to ensure continued expansion, investment, and job growth.”
*Central Provident Fund (CPF) refers to the pension fund system used in Singapore. Superannuation is the pension fund system used in Australia.