Where is the best country to retire?

Only a small group of countries have created pension systems that appear both adequate and sustainable

Renate Finke

Is it enough? This simple question of critical concern to retirees worldwide is part of a complex, vexing issue that governments are now grappling with.

With swelling numbers of retirees and slowly declining numbers of workers, pension provision is a delicate balancing act between caring for one generation – who have worked and contributed to the existing system – and ensuring the rights of future generations. With this in mind, governments have undertaken reforms that will generally leave people with lower retirement income relative to pre-retirement income compared with today’s pensioners.

To compensate for decreasing replacement rates, incentives have been introduced to foster funded occupational and private pension plans. This means that in the future, pensioners’ income mix will differ: the previously dominant first pillar (state pensions) will give way to funded elements; defined benefit (DB) will move toward defined contribution (DC) schemes; and family support structures toward more formalized public ones (as in Asia). But in the end, the question remains: will today’s employees receive an adequate retirement income to maintain their standard of living when they retire, or risk an income shortfall, or even poverty?

There is no ‘one-size-fits-all’ answer to adequacyThere is no “one-size-fits-all” answer. Adequacy can be defined as a social standard, such as the poverty line, as a percentage of pre-retirement income or within the life cycle ramework, in which case it often implies maintaining a certain standard of living. It might even be more appropriate to align adequacy to the special expenditure needs of elderly people. To gain an insight into the question of adequacy, International Pensions has created a Retirement Income Adequacy (RIA) Indicator. This is based on a wider approach toward retirement income than previous studies, as it takes more sources of income and factors influencing expenditure needs into account. We have ranked 49 countries according to their potential to provide adequate retirement income based on the stages of pension system development, as well as their social and economic background.

NETHERLANDS HEADS LIST

In general, pension systems with mature funded pillars in developed countries come at the top of RIA rankings. The Netherlands leads, followed by Denmark, Norway, Switzerland, Japan, the US and Austria. Sweden follows close behind. The Netherlands, Denmark, Switzerland, the US and Sweden score highly for their funded pillars and score at a high to moderate level for their public pension. They additionally show strengths in other factors, namely non-pension wealth, low spending needs for health and good progress with respect to an extended working life.

At the other end are developing countries without comprehensive pension systems. Indonesia and India score worst, mainly because they have a low coverage of their working-age population and an underdeveloped funded pillar, and face high out-of-pocket health expenditures, which weigh heavily on the elderly’s budgets. Malaysia scores higher because it can build on a mandatory funded pillar. The downside is that workers there can draw on this pension pot early so future retirees might run out of money. One of the problems confronting many countries can be seen in the case of Austria. While it receives a high score for its first pillar, making it into the top group, its funded pillar is underdeveloped; its employees still have low retirement ages and a long time spent in retirement.

Adequacy and Sustainability

This is a situation where the flipside of the adequacy coin is affected – sustainability. Countries like Austria, with just one strong pillar, may not be financially sustainable in the longer term. Austria still also has a significant gap of three years between the actual and official age of retirement (though Belgium and Luxembourg are far worse). Such a “youthful” retirement age for a society experiencing improving longevity will only place extra pressures on the system in the long run.

Today’s pension policy challenge is to balance financial sustainability and the retirement income adequacy of (future) retireesAs noted, today’s pension policy challenge is to balance financial sustainability and the retirement income adequacy of (future) retirees. In previous studies, International Pensions followed the development of pension reforms introduced as a result of aging demographics and deteriorating government finances.

The Pension Sustainability Index (PSI) focused mainly on the first pillar with the various characteristics of pension systems and the factors that influence them. In the Retirement Income Adequacy study we contrast the two for a more detailed overview of the various pension systems. In the recent report, several comparisons between the different pillars are to be found. In Figure 2, for example, we integrated the funded pension scheme sub-indicator of our RIA into the comparison. The adequacy component consists of the total pension system, making up 70% weighting in our indicator.

In this comparison, countries with major funded pillars move up the adequacy ranking: Denmark, Switzerland and the US can all be seen as broadly providing an adequate income.

Australia and the UK also move up, as well as Chile, Ireland, Hong Kong, Malaysia, Mexico, Singapore and Croatia, but remain in the middle. This is because features of the funded pillar have options not favorable for drawing a lifelong income stream.

In some countries accumulated assets are low because the system is young, such as in Mexico. Countries with a strong ranking according to the sub-indicator “Pillar I” are moving in the opposite direction. In the cases of Brazil, France, Italy, Malta, Slovenia and Spain this might become a problem in the long run. While they are seen as adequate they are ranked as more or less unsustainable in the PSI, so reforms are necessary to ease the long-term burden on public finances.

So where is a good place to be a retiree? Only New Zealand, the Netherlands, Finland and Norway appear to have created pension systems that are both adequate and sustainable. We are aware that such a comparison has shortcomings, but the RIA index does not claim to give an absolute judgment on respective systems. However, we believe the ranking can help foster discussion about the approaches toward generating an adequate income and about policy measures in place in various countries.

Where is the best country to retire?

Only a small group of countries have created pension systems that appear both adequate and sustainable

Renate Finke

Where is the best country to retire?

Only a small group of countries have created pension systems that appear both adequate and sustainable

Renate Finke

Pension Atlas

Greek pension scheme still struggling

Elizabeth Corley: A pension crisis is looming

Less wealth, lower life expectancy