The quality of pension systems available to workers varies greatly across the globe. The Netherlands has the best system, while the U.S. isn't even close to the top, according to the Melbourne Mercer Global Pension Index 2019.

The index, published by the Monash Centre for Financial Studies in collaboration with global consultant Mercer, compares 37 retirement income systems, covering a wide variety of pension policies and practices, in addition to suggesting ways that each system can be improved to provide more adequate retirement benefits.

Key Takeaways

  • The Netherlands, Denmark, and Australia have the best pension systems.
  • The U.S. ranks far from the top.
  • Common challenges pension systems around the world need to address include increasing the average retirement age due to rising life expectancy, encouraging more savings, and limiting access to funds before retirement.

Pensions are a unique and valuable type of retirement plan, in which an employer makes contributions to a pool of funds and invests it on the employee's behalf, with the earnings on said investments generating income to the worker upon retirement. In the U.S., more and more employers in the private sector have switched from traditional pension plans to 401(k)s.

Here, we take a look at the results of the latest index, released in Oct. 2019, which ranked the pension systems of 37 countries representing more than 63% of the world's population.

The Top 3 Pension Systems

The index compares retirement income systems and rates each based on its adequacy, sustainability, and integrity. The index value for each country is represented by a value between zero and 100, with higher values signifying more favorable pension systems.

The average score for the 37 countries included in the 2019 index was 59.3. The top three countries with the highest overall index grade were:

1. Netherlands

With an index value of 81, the Netherlands received the highest score for 2019, ranking first for the second year in a row.

Its retirement income system uses a flat-rate public pension and a semi-mandatory occupational pension linked to earnings and industrial agreements. Most of the Netherlands' employees are members of these occupational plans, which are industry-wide defined-benefit plans. Earnings are based on a lifetime average. The index found that the overall index value could be improved by:

  • Increasing household savings and reducing household debt
  • Increasing workforce participation among older workers as life expectancy rises

2. Denmark

Denmark came in a close second with an overall score of 80.3.

Worldwide, pension systems are under more pressure than ever before because of rising life expectancy, increased government debt, uncertain economic conditions, inflation risk, and a shift towards defined-contribution plans.

Denmark has a public basic pension scheme, a supplementary pension benefit tied to income, a fully funded defined-contribution plan, and mandatory occupational schemes. The index noted that Denmark's score could be improved by:

  • Increasing household savings and reducing household debt
  • Introducing measures to protect the interests of both spouses in a divorce
  • Increasing workforce participation among older workers as life expectancy rises

3. Australia

Australia ranked third with an overall index value of 75.3 in 2019. Its pension system includes a means-tested, government-run Age Pension, mandatory employer contributions paid into private-sector plans (primarily defined-contribution plans), and voluntary contributions from employers, employees, and the self-employed paid into private-sector plans. Here's what Australia could do to improve its overall index value:

  • Increasing the net replacement rate in the government pension for average income earners
  • Increasing household savings and reducing household debt
  • Mandating that part of the retirement benefit be taken as an income stream
  • Increasing workforce participation among older workers as life expectancy rises
  • Increasing the pension age as life expectancy rises

How the U.S. Scored

The U.S. tied with Malaysia, ranking 16 with a score of 60.6, which was better than 2018 when it came in at 19 with a score of 58.8.  The U.S. retirement income system includes Social Security and has voluntary private pensions, which can be occupational or personal.

The index had numerous recommendations for what the U.S. system could do to improve its overall index value:

  • Raise the minimum pension for low-income retirees
  • Adjust the level of mandatory contribution for median-income earners
  • Improve the vesting of benefits and maintain the value of benefits through to retirement
  • Limit access to funds before retirement
  • Require that part of the retirement benefit be taken as an income stream
  • Increase Social Security funding
  • Raise the state and private pension age to receive benefits
  • Provide incentives to delay retirement and increase workforce participation among older workers
  • Provide access to group retirement plans for workers who don't have an employer-sponsored plan

How All Countries Ranked

The following chart shows the 37 countries included in the index and how their pension systems scored and ranked in 2019:

Global Pension System Ranking by Country
Rank Country 2019 Index Score
1 The Netherlands 81
2 Denmark 80.3
3 Australia 75.3
4 Finland 73.6
5 Sweden 72.3
6 Norway 71.2
7 Singapore 70.8
8 New Zealand 70.1
9 Canada 69.2
10 Chile 68.7
11 Ireland 67.3
12 Switzerland 66.7
13 Germany 66.1
14 United Kingdom 64.4
15 Hong Kong 61.9
16 United States 60.6
16 Malaysia 60.6
18 France 60.2
19 Peru 58.5
20 Colombia 58.4
21 Poland 57.4
22 Saudi Arabia 57.1
23 Brazil 55.9
24 Spain 54.7
25 Austria 53.9
26 South Africa 52.6
27 Italy 52.2
27 Indonesia 52.2
29 Korea 49.8
30 China 48.7
31 Japan 48.3
32 India 45.8
33 Mexico 45.3
34 Philippines 43.7
35 Turkey 42.2
36 Argentina 39.5
37 Thailand 39.4
Source: Melbourne Mercer Global Pension Index 2019

Index Scoring Explained

The Melbourne Mercer Global Pension Index is calculated using the weighted average of three sub-indices. The average sub-index scores for all 37 countries were 60.6 for adequacy, 69.7 for integrity, and 50.4 for sustainability. This is what each sub-index takes into consideration:

Adequacy Sub-Index

The adequacy sub-index, which represents 40% of a country's overall index value, looks at how a country's pension system benefits the poor and a range of income earners. Additionally, the adequacy measure considers the system's efficacy and the country's household savings rate and rate of homeownership.

Sustainability Sub-Index

The sustainability index, which represents 35% of a country's overall index score, considers factors that can affect how sustainable a country's retirement fund system. Indicators include the level of coverage of private pension plans, government debt, and economic growth.

Integrity Sub-Index

The integrity sub-index makes up 25% of a country's overall index value. It examines the communication, costs, governance, regulation, and protection of pension plans within that country. It also considers the quality of the country's private sector pensions because, without them, the government becomes the only pension provider.

The Bottom Line

The Melbourne Mercer Global Pension Index includes recommendations to improve each country's retirement-income systems, acknowledging that no universal solution exists because each system has evolved from unique economic, social, cultural, political, and historical circumstances.

Common challenges in pension systems around the world include the need to increase the average retirement age to reflect increasing life expectancy, encourage more savings, and increase access to private pensions for the self-employed. Pension systems globally should also limit access to funds before retirement and improve transparency to improve participants' understanding and confidence.