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26 October, 2016

2016 Pension Sustainability Index – Allianz – September 2016

Allianz has published a new version of the Pension Sustainability Index (PSI). This indicator uses three sub-indicators (demographics; public finance, and design of the pension system) for systematically measuring long-term sustainability in a pension system.
Each sub-indicator is measured on the basis of a set of variables; each one of these variables is assigned a score from 1 to 10, in which 1 indicates the worst assessment (e.g., high levels of pension debt, high replacement rates, high rates of old-age dependency, or low retirement ages) and 10 indicates the best assessment. All variables are combined in a single score, ranging from 1 to 10 for each sub-indicator; finally, the three sub-indicators are combined into a single final score. A score of 1 would indicate that the country urgently needs to reform its pension system, since it is highly unsustainable, whereas a score of 10 would indicate that the country does not require any reform whatsoever.

The following factors would improve the sub-indicator index:

1. Demography:
a. The old age dependency ratio is favorable (low proportion of dependent workers aged 65 or more, in relation to the number of working-age people between 15 and 64).
b. Any change in the “work-retirement” ratio is expected to be moderate.
2. Public finance:
a. Low fiscal spending on pensions.
b. The State has sufficient resources for increasing its level of debt, or the burden on the economy, for financing rising pension costs.
3. Design of the pension system:
a. The public PAYGO pillar offers modest benefits and covers a large percentage of the population.
b. The retirement age is high, or is linked to life expectancy.
c. There is an individually funded pillar that complements retirement income.

As can be seen from the document, the top 10 countries with the most sustainable pension systems are: (i) Australia; (ii) Denmark; (iii) Sweden; (iv) the Netherlands; (v) Norway; (vi) New Zealand; (vii) Latvia; (viii) Estonia; (ix) US; and (x) Chile, whereas the 5 countries with the most highly unsustainable pension systems are: (i) Thailand; (ii) China; (iii) Slovenia; (iv) Greece; (v) Brazil; (vi) Italy; (vii) India; (viii) Malta; (ix) Japan; and (x) Spain.

To see the indicator in detail, please download it here.

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