Best Countries for Retirement Plans

MarketWatch

Some pension systems are better than others, but all countries struggle to offer benefits.

If you could move to any country of your choice to retire with the most secure pension benefits, which would you pick? By and large, experts who study pension systems say no country is a retirement Shangri-La, though certainly some places do better than others in providing for retirees' financial security.

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"I am having a hard time dredging up a country where things are copacetic," said Olivia S. Mitchell, a professor and director of the Boettner Center for Pensions and Retirement Research at The Wharton School. "Everyone pretty much has been hit by the global financial crisis and virtually everyone is confronting the aging revolution."

Others agreed. "We always regard this as a dreaded question: Which country has the best pension system?" said Edward Whitehouse of the Organization for Economic Cooperation and Development (OECD), which this summer published a definitive examination of pensions in 30 developed countries.

"There is no ideal model pension system in the world," he said.

And Giles C. Archibald, a worldwide partner with Mercer, said, "There's not one country that's got it right."

Still, pension experts say two countries are better than most: The Netherlands and Australia.

The Netherlands

The Netherlands has a generous, quasi-mandated, defined-benefit plan that's pre-funded, said Steve Sass, associate director for research at the Center for Retirement Research at Boston College. Plus, he said the Netherlands' government and other institutions seem competent. "The country seems reasonably capable of addressing issues that inevitably arise in the operation of a very long-term economic institution such as a pension plan," he said.

For his part, Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute, agrees that the Netherlands is among the countries with the best pension system in the world -- especially when health care is considered in the equation. "If part of the health equation is quality and modern technology as well as comprehensiveness of coverage," he said.

When it comes to retirement security, researchers tend to look at the percent of pre-retirement income replaced through public and private pensions, rather than pensions and earned income. The higher the portion that comes from public and private pensions, the more secure, relatively speaking, retirees are.

That's why some researchers hold out the Netherlands as a model country. Many retirees are able to replace close to 100% of their pre-retirement income through earnings-related defined-benefit plans, which cover more than nine in 10 workers, plus the country's flat-rate public scheme, which covers all residents.

Most of the employer-sponsored defined-benefit plans replace 70% of a workers' final pay. Meanwhile, the public-pension plan replaces 30% of a worker's average pay.

Still, it would be near impossible for other countries to duplicate what exists in the Netherlands.

"The Netherlands has a great tool in the form of its basic pension," Whitehouse said. "The occupational schemes have very wide coverage. However, the broad coverage cannot be replicated in other countries, since, like Denmark, Sweden and Norway, it is a result of a highly centralized structure of industrial-relations agreements. Most countries cannot replicate this."

What's more, Whitehouse said that pensions in the Netherlands -- as in most countries -- are under severe stress. In fact, the defined-benefit plans in the Netherlands are now cutting back on benefit adjustments which are generally indexed to wage growth, according to a report on the state of pensions in OECD countries.

"The effect of these policies affects equally retirees' benefits and accrued pension rights of workers," the report said.

Australia

Australia's retirement-income system has three parts: one, a Social Security-like system that provides pension benefits based on the recipient's income level and is funded from general tax revenues instead of a worker's payroll tax; two, mandated contributions by the employer to a worker's defined-contribution plan; and three, voluntary contributions by the employee to his defined-contribution plan.

To be sure, Australia's pension system leaves plenty to be desired. According to Whitehouse, Australia has a means-tested public pension with a mandatory defined-contribution scheme on top. Whitehouse said there are "very high administrative charges for some plans ... and issues with the tax treatment." What's more, its superannuation funds fell 26.7% in 2008, the second worst investment performance for private pensions in the 30 OECD countries. And if all that wasn't enough, the OECD notes that more than one in four Australian seniors live in poverty.

But Archibald and others says two features about Australia's pension system are worth noting. One, the country has made the transition from defined-benefit to defined-contribution plans in such a way that there's "little variability around what employers are doing," he said. In the U.S., by contrast, just one in every two workers has access to a defined-contribution plan and among those who do have access there's a great deal of variation.

"One of the issues around retirement benefits is that it eats up lots of resources that a country might use for other purposes," said Archibald in praise of Australia's system.

And two, Archibald said Australia will be increasing its retirement age from 65 in 2017 to 67 by 2023, a move that could help improve retirement security for its citizens.

Retirement Age? Think Older

But though Australia and the Netherlands are viewed, at least by some experts, as having the best pensions systems in the world, the OECD suggests that much is needed in the way of pension reform around the globe. And encouraging people to work longer -- through increases in pension age and reducing pension incentives to retire early -- is a key objective, according to the OECD.

Countries must shore up the long-term finances of pension systems crippled by aging populations and out-of-date laws, the group said. Consider, for instance, how the worker-dependency ratio has changed over the years. In 1950, there were seven people of working age for every one of pension age. Today, there are four workers for every one of pension age and by 2047 there will be just two workers for every one of pension age.

"Life expectancy has increased so the retirement age must go up," Archibald said. "People can't expect to live one-third of the life being educated, one-third working, and one-third in retirement."

According to the OECD, retirement ages, after falling for decades, have indeed risen since 2000. And some countries are increasing the full retirement age to beyond age 65: Australia and Germany to 67; the United Kingdom to 68; and Denmark to age 67 and then linked to life expectancy, according to the OECD. Along with Norway, Iceland and the U.S. that brings to seven the number of OECD countries that already have or plan to have normal pension ages above 65.

Despite its apparent benefit, however, proposals to increase the normal pension age are met with strong resistance, the OECD said. Given that, they said, other types of reform merit attention, including those that provide incentives for people to work longer. "In Belgium, Denmark, Greece and the Netherlands, the option of retiring early has been restricted," according to the OECD. "Finland, France and the United Kingdom have improved the returns to working after normal pension age."

"If people were to work longer as they live longer, that change alone would go a long way in ensuring that public pensions are affordable, and that their costs are sustainable in the long term," the OECD reported.

Those costs are substantial. Consider this: OECD countries currently spend an average of 7.2% of national income on public pensions. But the figure varies widely. Italy spends the most at 14% while Mexico spends the least at 1.3%. Of note, the Netherlands spends 5% and Australia spends just 3.5%.

For its part, the OECD said countries need to go through the painful process of putting their pension system on sounder financial footing. Korea, for instance, recently lowered its target pension-relative-to-earnings replacement rate from 60% to 40%.

An Adequate Retirement Income

Make no mistake: Public pensions are scaling back and many countries are encouraging people to save voluntarily. And some of the reforms are designed to do just that.

"France, Hungary, Poland and Portugal have introduced new private-pension plans, often with tax privileges," the OECD said. "Germany extended the tax incentives that were due to expire in 2008. Norway mandated employers to contribute a small amount to private pensions. New Zealand introduced its KiwiSaver scheme, which requires individuals to opt out of rather than opt in to private pensions. And the United Kingdom has legislated for a similar scheme that will begin operating in 2012."

Despite all the changes occurring and those being proposed, pension experts say there is still much to be done and governments should stay focused on the long-term and not backtrack on earlier reforms.

Said the OECD: "It remains necessary, in spite of [the economic crisis and worsening labor market conditions], that governments take steps to ensure that public policies deliver a retirement-income system for the long term that is secure, adequate, financially sustainable and economically efficient."

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