Australia's pension system ranks high but has a hazy future

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Australia has been awarded third place in an international ranking of the world’s best performing pension systems, behind Denmark and the Netherlands, according to the 2015 Melbourne Mercer Global Pension Index.

Despite this, Australia’s overall rating has dropped from 79.9 in 2014 to 79.6 in 2015 with the system’s sustainability dragging down the overall mark. While scores for size and integrity of our system were well above average, it fell short in providing measures to future proof our system such as increasing workforce participation of older workers and reducing government debt.

“Our seven-year snapshot highlights the importance of measures such as adjusting the state pension age, increasing workforce participation amongst our ageing population, or funding additional contributions for future retirement income,” said Dr David Knox, author of the report and Senior Partner at Mercer.

The index has been running since 2009 making it a useful tool for longer-term assessment of changes to legislation and regulations. This includes planning for future challenges including the increase in the average length of pensions from 16.6 years to 18.4 years which has taken place over the last seven years.

The Federal Government will be progressively lifting the pension age to offset this increase in life expectancy but it will be a couple of years yet before we start to see the effects of this change.

How can we make our system more sustainable?

With future projections suggesting a continued decline in the sustainability of the Australian pension Amy Auster, Executive Director of the Australian Centre for Financial Studies, has called for action to increase the sustainability of the system for future generations.

“A critical take-away from this year’s report is the reminder that pension systems are like cargo ships that require a lot of lead time and preparation to safely adjust their course,” Ms Auster said.

Suggestions from Mercer include encouraging an increase in labour force participation rates and introducing a mechanism to increase the pension age as the life expectancy continues to grow in Australia.

Other recommendations include the introduction of a requirement that part of the retirement benefit be taken as an income stream and increasing the minimum access age to receive benefits from private pensions.

“Extending the years that individuals spend in the workforce is one of the most positive ways of developing sustainable retirement systems when life expectancies are increasing,” Dr Knox said. 

“While there is a natural limit to the participation rate at older ages, with most countries still below 70%, the scope for significant increases across the world remains, which would improve the sustainability of many pension systems,” Dr Knox added. 

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