Australia’s retirement income system most sustainable in the world

Australia’s retirement income system most sustainable in the world

Sydney, 3 April 2014

Allianz report finds that Australia’s combined public and private retirement incomes system is the most financially sustainable of the 50 countries studied.

Australia was joined by only three other countries - Sweden, New Zealand and Norway - in the most sustainable group.

However, the report warns that the ability to take lump sum superannuation payouts may create retirement income adequacy problems.

Allianz has released its 2014 Pension Sustainability Index (PSI). The PSI systematically examines key elements of pension systems (both public and private) and the developments that influence them in order to evaluate the pressure on governments to effect reform to improve the fiscal sustainability of their systems. Fifty countries are analysed according to a range of parameters – demographic change, pension generosity and fiscal sustainability - in order to arrive at a country ranking that reflects the long-term sustainability of different pension systems – see attached.

The amount of burden a country’s pension expenditures place on public finances is a core sub-indicator of the study. Therefore, Australia’s two-tier system combining a lean public pension with highly developed funded pensions is under the least pressure to reform. Australia leadership position is followed in order by Sweden, New Zealand, Norway and the Netherlands.

New Zealand’s population is not aging quite as rapidly as many other developed countries therefore its pension system – together with a relatively low debt-to-GDP ratio, a moderate pension design and a labour force that tends to work beyond the statutory retirement age – makes it highly sustainable for the future.

Commenting on the results, Allianz Australia’s Managing Director, Niran Peiris, said “pension reforms over the last few decades have dramatically changed the global retirement landscape. Such reforms include the move from pay-as-you-go systems towards funded systems, and the change from defined benefit to defined contribution systems.”

“Australia was an early reformer in the move towards defined contributions systems and more recent initiatives, such as the funding of Commonwealth public service super liabilities through the establishment of the Future Fund, have helped Australia obtain and maintain its leadership position in Allianz’s Pension Sustainability Index.”

The 2014 PSI report indicates that Australia and New Zealand’s top rankings have not changed since the previous study. The report found that Australia and New Zealand have well-balanced old-age provisioning structures with baseline public pensions complemented by privately funded pillars. Combined with favourable demographics and well-managed public finances (more so in New Zealand), these features have put Australia and New Zealand in a good position to provide for their senior citizens.

One of the elements of pension system design that bears on sustainability is the replacement rate, measured as the proportion of the ‘gross public pension’ compared to average incomes. A low replacement rate will put less pressure on public finances, a key sub-indicator of the PSI of which government expenditure on pensions as a proportion of Gross Domestic Product is a key component.

The report found that Australia’s gross public pension as a proportion of average income was 42%, which is relatively low compared to many countries such as Canada, France, Germany, Spain, Italy, Japan and Korea, which measured closer to 60% on this metric. This ratio for Spain was more than 70% and for Italy it was 80%.

On this point, Mr Peiris said, “the report describes Australia’s regime as a ‘bottom-draw’ pension system, where the public system covers the basic requirements for a retirement income in order to prevent old-age poverty, with additional income needed to maintain higher standards of living generated through privately funded sources. These features help our high sustainability score on the Index.”

“The report though sounds a small warning to Australian policymakers, suggesting that the question of retirement income adequacy could become a question for Australia. The report highlighted that allowing people can take all their superannuation savings as a lump sum to be used to repay home mortgages or other purposes risked leaving retirees with reduced incomes for their retirement.”

View the full report here.

Allianz Australia
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Allianz Australia delivers a wide range of personal, commercial and corporate insurance products and services to more than 2 million policyholders. Over 50% of Australia’s top 200 BRW-listed companies have some form of insurance cover with the group and the group provides workers compensation services to around one-fifth of Australian employees.

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