The ratio of working years to retirement years should be a minimum of 2 to 1, says David Knox, senior partner at Mercer and author of the Melbourne Mercer Global Pension Index, who says increasing the pension age is a universal policy solution to the pension crisis.

He points to the Netherlands as an example of best practice in this regard, where an increase in the target retirement age is automatically triggered by any increase in life expectancy, as determined by the Dutch Central Bureau of Statistics.

From January 1, 2018, the target retirement age for occupational plans in that country will increase from 67 to 68.

“If you live to age 95 but retirement is at 65, sustainability of the system is under pressure,” he says. “You will be in retirement for 30 years but you wouldn’t have worked 60 years to support that.

“In the old days, when people retired at 65, they would die at age 75, that ratio was more like 4 to 1. The ratio of working to retirement years shouldn’t be less than 2 to 1, preferably a bit more.”

In Australia, as in many countries, the retirement age has not changed for more than 100 years. The pension age was set at 65 in 1909 and was not set to change until 2009, when the Rudd government announced it would be increased to 67 by 2023.

Knox says Australia could benefit from taking the pension age out of the political system and adopting an automatic increase like the Netherlands has.

“I don’t advocate that we increase this tomorrow, there has to be a gradual transition, but we could do something like use the intergenerational report to adjust the age 10 years out,” he says. “Whatever age you pick, some people will have to retire before that and we need to support them. But if we change the pension age, then we change the mindset; and if you work longer, then you are drawing on super later.”

He says increasing the pension age adds to the sustainability of the system, but also adds to the awareness people have of working longer because they are living longer.

The Mercer pension index compares the retirement income systems in 30 countries using more than 40 indicators that benchmark each country’s system. The index uses three sub-indices as metrics: adequacy, which accounts for 40 per cent of the index score; sustainability (35 per cent); and integrity (25 per cent). The Australian system ranks third, behind Denmark and the Netherlands.

Knox says many of the challenges relating to ageing populations are similar around the world, irrespective of a country’s social, political, historical or economic circumstances.

He says the policy reforms needed to alleviate these challenges are also similar. In addition to increasing the pension age, he suggests encouraging people to work longer, addressing the level of funding set aside for retirement, and employing benefit design that can reduce leakage of benefits before retirement.

Join the discussion