Australia’s retirement income system has dropped from third to fourth place in the world, weighed down by declines in household savings and the tougher age pension assets test Mercer’s annual global study has found.
The Netherlands ended Denmark’s six-year winning streak by clinching first place in the 10th-annual Melbourne Mercer Global Pension Index (MMGPI), released on Monday. Finland’s system ranked third, followed by Australia.
In 2018, Australia’s overall index value was 72.6, down from 77.1 last year. Australia’s peak score was 79.9, in 2014.
The author of the study and a senior partner at Mercer Australia, David Knox said the drop can be attributed to a drop in the adequacy sub index from 75 t0 around 63.
“The primary cause of that is the fall in the net replacement rate for an average income earner as calculated by the [Organisation for Economic Co-operation and Development] OECD,” he said on Monday morning. But Knox also called out a drop in the household savings rate and the tougher assets test for the age pension introduced in January last year.
“The previous asset test reduced the age pension by $1.50 per fortnight, per $1000 of assets. That penalty was doubled to $3 per fortnight. That caused a drop in the replacement rate,” he explained.
The index is based on an assessment of both the public and private pension systems of 34 countries, using 40 indicators to gauge adequacy, sustainability and integrity.
Knox said ensuring the right balance between adequacy and sustainability was the “natural starting place” for a world-class pension system.
“It’s a challenge policymakers are grappling with,” Knox said. “For example, a system providing very generous benefits in the short term is unlikely to be sustainable, whereas a system that is sustainable over many years could be providing very modest benefits. The question is, what’s an appropriate trade-off?”
Knox said it was not enough for a system just to be sustainable or adequate.
“An emerging dimension to the debate about what constitutes a world-class system is ‘coverage’ and the proportion of the adult population participating in the system,” he said. “With changes in the way people are working around the world, we need to ensure these schemes include everyone so that the whole workforce is saving for the future. This includes contractors, the self-employed and anyone on any income support, be that parental leave, disability income or unemployed benefits.”
In 2018, Hong Kong SAR, Peru, Saudi Arabia and Spain were included in the index for the first time.