Reforming against the demographic clock
The Allianz Global Pension Report analyzes 75 pension systems around the globe using its proprietary Allianz Pension Index (API). View the complete report findings here.
Munich, April 19, 2023–Allianz today launched the second edition of its Global Pension Report. The index consists of three pillars: Analysis of basic demographic and fiscal conditions as well as determination of the sustainability (e.g. funding and contribution periods) and adequacy (e.g. degree of diffusion and pension level) of the pension system. A total of 40 parameters are considered, with values ranging from 1 (very good) to 7 (very poor). In the weighted sum of all parameters, the evaluation of the respective system crystallizes into one overall score.
No Respite
The Corona pandemic has led to a decline in life expectancy in many countries; in a few, a (small) baby boom could even be registered. However, this is only a short-term interruption of the unabated and accelerating trend of societal aging, readable in the global old-age dependency ratio[1]: by 2050, it is expected to climb from 15.1% today to 26.3%; in 2019, an increase to “only” 25.3% had been forecast. “The latest data from China, Korea or Italy, for example, point to speedup of demographic change,” said Michaela Grimm, co-author of the report. “In particular, birth rates are developing even worse than assumed, despite all family policy efforts. But it doesn’t help to lament; we have to face the facts: The intergenerational contract has become fragile. The younger generations Y and Z in particular are being called upon to make (even) greater provision for old age themselves. The inconvenient truth is: they have to work longer as well as to save more and in a more focused way.”
Busy Standstill
The unweighted overall score for all pension systems studied is 3.6: barely satisfactory. Compared to their last report in 2020, this represents only a small improvement. On the one hand, this is hardly surprising: After Covid 19, war and the energy crisis, the fiscal space of most countries has narrowed even further. On the other hand, however, it is very disappointing: the need for pension reforms is not in dispute, but rhetoric is rarely followed by powerful action: work on the pension construction site is not progressing. In fact, only a few countries – such as France or China – have managed to significantly improve their scoring through reforms. France almost exemplifies the political dilemma of such reforms, as they turn the usual political economy on its head: Instead of handing out benefits today in exchange for impositions later, they require impositions today to avoid cuts later. The few pension systems that are doing well today – notably Denmark, the Netherlands and Sweden, with an overall score well below 3 (see table) – therefore also have one thing in common: they set the course for sustainability very early on, at a time when the demographic bomb was still ticking quietly. They can therefore serve as a model for many developing countries, which also still have a window of opportunity to stabilize their pension systems. In many other countries, however, it will hardly be possible without painful reforms.
Rethink
In addition to the technical details, such as contribution levels and periods, there is a key adjustment for sustainable and adequate pension systems: the social value of work. “Automation, digitalization and artificial intelligence are enabling universal access to education and thus new concepts of work. The dissolution of the rigid dichotomy between employment and retirement currently exists only for a privileged few. The pension system of the future starts by rethinking the world of education and work for all,” said Ludovic Subran, chief economist at Allianz.
No Reason For Complacency
With an overall score of 2.9, the US pension system ranks among the best in the world. Viewed from “old” Europe, even the demographic outlook is not dramatic: although the old-age dependency ratio is set to rise to 38.9% by 2050, it will remain way below the levels seen in many European countries. But even so, there is no reason for complacency. Social Security, for example, will run out of money in the early 2030s if things are left as they are. Technically, the necessary fixes should be not too difficult, as contribution rates are still relatively low. But the politics of entitlement programs are treacherous. The biggest challenge for the US pension system, however, may lie elsewhere: the shrinking of the middle class and the growing inequality can fray the social fabric.
The best pension systems worldwide with a total score below 3
Country | Total score | Basic conditions (score) | Sustainability (score) | Adequacy (score) |
Denmark | 2.2 | 3.0 | 2.5 | 1.4 |
The Netherlands | 2.6 | 2.9 | 3.4 | 1.7 |
Sweden | 2.6 | 3.1 | 2.9 | 2.1 |
New Zealand | 2.8 | 3.1 | 3.4 | 2.1 |
USA | 2.9 | 3.5 | 2.8 | 2.6 |
Taiwan | 2.9 | 4.0 | 2.8 | 2.4 |
Israel | 2.9 | 2.8 | 3.5 | 2.5 |
Belgium | 3.0 | 3.9 | 3.0 | 2.4 |
About Allianz
The Allianz Group is one of the world’s leading insurers and asset managers with more than 122 million* private and corporate customers in more than 70 countries. Allianz customers benefit from a broad range of personal and corporate insurance services, ranging from property, life and health insurance to assistance services to credit insurance and global business insurance. Allianz is one of the world’s largest investors, managing around 683 billion euros** on behalf of its insurance customers. Furthermore, our asset managers PIMCO and Allianz Global Investors manage about 1.6 trillion euros of third-party assets. Thanks to our systematic integration of ecological and social criteria in our business processes and investment decisions, we are among the leaders in the insurance industry in the Dow Jones Sustainability Index. In 2022, over 159,000 employees achieved total revenues of 152.7 billion euros and an operating profit of 14.2 billion euros for the group.
* Including non-consolidated entities with Allianz customers.
** As of Dec 31, 2022
[1] People aged 65 or older as percentage of the working population (15 to 64 years).
