M-RCBG Associate Working Paper No. 39
Global Pensions Underfunding
Thomas J. Healey and Catherine M. Reilly
Public pension systems around the world are struggling to meet their commitments to their members. Aging populations have put a severe strain on programs designed for different demographic times and, consequently, these systems often find themselves buckling under the pressure. Exacerbating the problem are rising government debt ratios in the wake of the global financial crisis, as well as poor investment returns which have negatively impacted funding.
In practice, countries differ widely in how efficiently and effectively they’ve managed their retirement programs. That point is driven home in this comprehensive report, Global Pensions Underfunding, which studies pension systems in 33 countries across five continents. The goal of the study was to identify the pressures and problems these countries face, as well as possible solutions based on academic research and approaches that some of the most progressive countries have employed.
To evaluate the pension systems of different countries, this study uses two fundamental metrics: sustainability (the burden that projected spending under a pension system places on public finances; high sustainability implies a low burden) and adequacy (the ability of a pension system to ensure beneficiaries an adequate level of retirement income, defined here as 60% of the average wage for all over 65-year-olds).
This study is committed to finding ways that countries could provide for their retired population without putting an unreasonable strain on public finances. What it found was that this feat requires improving both adequacy and sustainability simultaneously. We call the balance between adequacy and sustainability efficiency.
Overall, the study found that a number of countries provide and are able to sustain an adequate retirement commitment to their citizens. Many European countries, however, are likely to find sustainability an increasingly difficult challenge within their current economic frameworks. They include Austria and Hungary, which provide very generous pension benefits, and Italy and Greece, whose heavy debt loads will make it difficult for them to meet their long-term pension commitments.
In the case of Korea and India, the ease with which they sustain their pension systems is driven primarily by their meager pension commitments to citizens. Other countries rating similarly low on the pension adequacy scale are Mexico and China.
Several countries excel in their ability to both provide adequate pensions and finance them efficiently. They include the Netherlands, Switzerland, the UK and Sweden. Surprisingly, the US and Australia provide only modest pensions despite their considerable private retirement assets; this is due to their meager public pension commitments.