Executive Summary
Allianz published the third edition of its “Global Pension Report”, which analyzes 71 pension systems around the globe with the help of the company's own “Allianz Pension Index” (API). The indicator consists of three pillars: analysis of the demographic and fiscal situation, and an assessment of the sustainability (e.g. financing and contribution periods) and adequacy (e.g. coverage and pension levels) of the pension system. A total of 40 parameters are taken into account, with scores between 1 (no need for reform) and 7 (acute need for reform). The weighted sum of all parameters reflects the pressure for reform in the respective system.
High reform pressure
The unweighted overall score for all pension systems analyzed is 3.7, signaling continued high pressure to reform. Compared to our last report from 2023, there has been some movements – but not always in the right direction: The overall score was at 3.6 at that time. However, there are significant differences between countries. There is a small group of countries, such as Denmark, the Netherlands and Sweden, which with an overall score well below 3 are doing relatively well because they set the course for sustainability in good time by embracing funded systems (see list of best pension systems). At first glance, it may come as a surprise that Japan is also on this list. But like no other country, Japan has consistently taken a different approach: working longer. Even today, one-third of 65- to 70-year-olds are still in employment; in the next few years, the effective retirement age is expected to rise to 70. By far the larger group consists of countries with an overall score below 4, where there is an urgent need for reform to protect the pension systems against the effects of demographic change. This group includes many developing countries such as Malaysia, Colombia and Nigeria. Their problem is often not the design of the pension system per se, but its limited reach: the share of informal employees who are not covered is usually over 50%. In these countries, far-reaching labor market reforms are therefore needed first to create the basis for a comprehensive pension system. Otherwise, the pension system will become yet another factor increasing inequality. Finally, the third group of pension systems includes many European countries such as Germany, France and Italy, whose pension systems have so far taken only tentative steps towards funding – the pay-as-you-go system dominates and the pressure for reform is correspondingly high in view of the rapid aging of societies.
Migration: Losing effect
Demographic change has been a reality for years. Life expectancy has been rising continuously for decades (with only a brief interruption due to the Covid-19 pandemic), while birth rates continue to fall. However, one development has significantly mitigated the expected impact on labor markets and social systems: migration. In the past five years, for example, almost 90% of the 1.6 million new jobs subject to social security contributions in Germany were filled by immigrants. Even if not all immigrants found a job immediately, migration has helped a lot on balance. We probably can't rely on that in the future. Because in the main countries of origin, there are simply fewer and fewer candidates willing to emigrate. And Germany could lose some of its appeal as a country of immigration in the future. It will therefore be crucial for us to make even better use of the existing potential. This applies to part-time women, who need to be relieved of childcare and nursing care, and older employees, who still too often face age discrimination in the workplace.
Pension savings gap can be closed
According to Allianz calculations, the pension savings gap for younger generations in the eurozone alone is around 350 billion euros per year on average. That sounds like a lot – but it is bridgeable if the savings rate were to rise by a quarter. Gen Xers need to save more to ensure their desired standard of living in old age – that's indisputable. But we must not just look at one side of the equation, the savings efforts of households. It is crucial to think about pension security and capital market development together. Retirement savings must be invested profitably in future growth and innovation. This is the key to overcoming demographic change (as well as climate change). Europe still has major deficits in this area.