Financial services company Allianz has ranked the South African pension system at the bottom of a global ranking of 75 countries. The Allianz Pension Index, published in the firm’s Global Pension Report, ranked countries based on three pillars: analysis of basic demographic and fiscal conditions; determination of the sustainability and adequacy of the pension system.
The report found that South Africa’s pension system received an overall score of 4.2, placing it at the bottom of the global list. The system is plagued by low coverage, low benefit levels, and a lack of retirement savings, which are putting the adequacy of the system at risk. South Africa’s pension system is also one of the least generous in the world, with a gross benefit level of just 15%.
Despite ranking 23rd in private household net financial wealth, the report highlights that South Africa has the potential for pension reform based on its relatively low old-age dependency ratio and financial leeway. The authors of the report say that South Africa has two significant advantages: it still has financial leeway as public spending for the elderly is very low, and it will remain a “young” country. The old-age dependency ratio is expected to rise to 16.3% by 2050, making South Africa one of the countries with the youngest population worldwide. The report suggests that the sooner pension reforms are enacted, the better.
Allianz compared pension systems worldwide to “a large construction site with no prospect of completion.” The report warns that most countries struggle to improve their pension systems, and the unweighted overall score for all pension systems studied is 3.6, barely satisfactory. The report authors point out that only a few countries have managed to significantly improve their scoring through reforms, such as France and China.
The few pension systems that are doing well today – notably Denmark, the Netherlands, and Sweden, with an overall score well below 3 – 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 stabilise their pension systems. In many other countries, however, it will hardly be possible without painful reforms.
The report highlights that demographic changes, such as an ageing society, will place an increasing burden on younger generations to provide for their retirement. By 2050, the global old-age dependency ratio is expected to climb from 15.1% today to 26.3%. In 2019, an increase to “only” 25.3% had been forecast. The report authors say that only a few countries are prepared for coming demographic changes based on the ageing of societies at an unabated pace.
The report concludes that 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 that they have to work longer as well as to save more and in a more focused way.
Overall, the report highlights the urgent need for pension reform in many countries worldwide. The demographic changes of ageing societies and low birth rates mean that the younger generations will have to bear a more significant burden to provide for their retirement. Countries with struggling pension systems, such as South Africa, must enact painful reforms to stabilise their pension systems before it is too late.
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