Three Latin countries top United States for pension system

25 October 2018 Authored by Consultancy.lat

Chile, Colombia and Peru are all better prepared to accommodate their ageing population that the United States, according to a new study by Mercer. Countries all across the globe are grappling to deal with an ageing population and how the issue will effect economics, finance and society as a whole. As birth rates continue to decline and populations continue to grow older, the way in which governments prepare for the future of their pension systems will reflect the health of their societies.

“Pension systems around the world, including social security systems and private sector arrangements, are now under more pressure than ever before. Significant ageing of the population in many countries is a fact of life. Yet this is not the only pressure point on our pension systems,” said David Knox, Senior Partner of Mercer.

Whilst the study, titled Melbourne Mercer Global Pension Index 2018, states that judging a country’s system is difficult due to different levels of socio-economic development and political stability, it is increasingly clear what good practices look like, and where they stem from. The top of the list is dominated by Northern European and Anglo states – besides the UK and the US.

Calculating the Melbourne Mercer Global Pension Index 2018 Latin America

It may come as a surprise to some Americans and yet potentially not to others, that the United States is not the best place to retire west of the Atlantic Ocean. The US may have the largest GDP per capita across the continents but that wealth is not represented in its pension system. Out of the eight American nations which appear on the index, the US appears fifth – above Brazil, Mexico and Argentina.

The study which has been conducted by the global human capital and investment consultancy assesses pension systems based on three categories; adequacy, sustainability and integrity. At the top of the list globally is the Netherlands, followed by Denmark. These two European countries are the only two in the top tier bracket with a score above 80 on the index.

To get a great score, a country must have a robust retirement income system that is likely to lead to improved financial benefits for the older members of society, an increased likelihood of future sustainability of the system, and a greater level of community confidence and trust. 

Within the Americas, Chile’s pension system tops the charts, with an overall score of 69.3, which is between that of Singapore and New Zealand. Chile’s retirement system is a means-tested social assistance managed by a private administrator as well as a framework for supplementary plans sponsored by employers.

Global graph of Melbourne Mercer Global Pension Index 2018 Americas

The Canadian system was ranked in a similar position by the researchers, and has one universal flat rate for pensioners which is supported by a means-tested income supplement and individual income savings plans. Canada scored a flat 68 on the index and was followed by Switzerland, Ireland and Germany.

Following as the first in the fourth bracket (60-65 index points) is Colombia. Colombia has recently emerged as a regional economic force to be reckoned with, having been invited to join the OECD earlier this year. Colombia’s shortcomings however lie within its contributions to the poorest aged individuals and the sustainability of the system, with a recommendation to boost the age of the state pension over time.

The UK’s system is situated directly in between Colombia and Peru, who are then followed by France. Peru’s system faces many of the same issues as Colombia’s due to the unequal distribution of wealth, a demographic which the two countries share. The country could fast track improvements by growing integrity in the forms of regulation and governance of the system as a whole.

Sustainability to adequacy graph of Melbourne Mercer Global Pension Index 2018

The United States trails Saudi Arabia at the beginning of the fifth bracket – which also includes Brazil – leaving it sitting below the global average rating. The report states that countries in this category have “a system that has some good features, but also has major risks and/or shortcomings that should be addressed. Without these improvements, its efficacy and/or long-term sustainability can be questioned.” 

Mexico and Argentina sit at the bottom of the index with India and China, as their systems have major weaknesses which must be addressed. The authors of the report said that “without improvements, efficacy and sustainability are in doubt.” Both Latin powerhouses must raise the minimum pension avaliable to the poorest aged individuals – akin to both Colombia and Peru, as well as make multiple other corrections as to the integrity and adequacy sub indexes.

"Latin America has a long way to go. It is fundamental to understand that both the political instability of several countries, as well as the social and economic crisis in the region, have been causing more obstacles in the direction and consolidation of the pension systems. They postpone discussions at the highest technical level, which are necessary to improve the future of the region and force most countries to have reforms or legislation to strengthen the three sub-indices that our study measures," explained André Maxnuk, CEO for Mercer Mexico and Leader of the company for Latin America.

"With a participation of six countries in a list of 34, we observed that the evaluation of Latin Americans indicates an urgent need to review the current structures. It is important to evaluate that each structure is evaluated based on common parameters of good practices or management, but it is respected that there is no single and common system as a solution for all," Maxnuk concluded.

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