The authors of a major global pensions study have recommended Australia lift the superannuation guarantee rate and keep citizens working longer.
The eighth annual Melbourne Mercer Global Pension Index (MMGPI) has again lauded Denmark for having the best retirement incomes system in the world.
Denmark and The Netherlands were the only countries to receive an A rating. Australia ranked in third place with a B+ rating.
The study is produced annually by international consulting firm Mercer in partnership with The Australian Centre for Financial Studies, which is based out of Monash University in Melbourne.
In 2016 Australia’s overall index value fell from 79.6 in 2015 to 77.9.
The authors said this was largely due to a reduction in the net replacement rate, which they said could be blamed partly on a decision in last year’s federal budget to defer a planned rise in the superannuation guarantee contribution rate.
Australia’s compulsory employer contribution rate is currently frozen at 9.5 per cent until 2021, after which it is scheduled to rise 0.5 per each year until it reaches 12 per cent in 2025.
Professor Rodney Maddock of the Australian Centre for Financial Studies said Australia must proceed with plans to increase the superannuation contribution rate, as well as deferring both the retirement and pension eligibility age.
He said these steps were necessary before Australia could be awarded an A rating from the MMGPI, and to ensure the ongoing sustainability of the nation’s superannuation scheme.
“The key to maintaining Australia’s robust system is careful planning and brave leadership from our governments,” Maddock said.
“Australians are living longer, living larger portions of their life in retirement and spending more in retirement, so we need to be well-placed to ensure fulfilling, adequately-funded retirements.”
The report also recommended that retirees should be required to convert at least a part of their super into an income stream, rather than cashing it in as a lump sum.
Last year the Turnbull government said it plans to make it mandatory for all super funds to offer all retiring members an account based pension, although citizens will be permitted to opt-out and withdraw their capital if they prefer.
Increasing the labour force participation rate at older ages, to combat the cost of rising life expectancies, was another policy recommendation from the report.
The authors also suggested the government introduce a mechanism to increase both the age pension eligibility age, and the minimum age at which savers are allowed to access the benefits from their superannuation-funded private pension, in line with increases in average life expectancy.
Mercer senior actuarial partner, Dr David Knox, warned of a global challenge with many countries even less prepared than Australia to deal with the impact of rapidly ageing populations, and the “significant financial pressures” this is set to place on their economies.
“The impact of longer life expectancies, combined by global declining birth rates, is much more significant than has been recognised by many governments and communities,” Knox said.
He said the research showed an “alarming” projected old age dependency ratio in many regions.
“The range of the ratio is stark, predicting that in South Africa there will be one retiree for every seven people of working age, while in Japan the number drops to one retiree for every 1.44 people of working age by 2040,” Knox said.
Many governments globally will need to make urgent changes to ensure that current retirement systems are sustainable and able to provide adequate benefits for decades to come.
“It is a political imperative that all countries, regardless of their size, and current standing on the MMGPI, implement the necessary policy changes to withstand future challenges presented by the globally ageing population,” Knox said.
The MMGPI is the world’s most comprehensive comparison of global pension systems, and this year it covered close to 60 per cent of the world’s population, measuring 27 systems against more than 40 indicators to gauge their adequacy, sustainability and integrity. It included diverse countries across the Americas, Europe and Asia-Pacific regions. Malaysia and Argentina were included for the first time in the 2016 study.