Good result but capable of better. That's the verdict on Australia's retirement income system in a recent report comparing the adequacy, sustainability and integrity of public and private pensions across 11 countries.

“We're not getting as much value from our system as we could”, says the report's author, Dr David Knox, a partner in Mercer's retirement, risk and finance business.

Australia ranked second overall in the inaugural Global Pension Index produced by Mercer and the Melbourne Centre for Financial Services.

The Netherlands scored the top rating with 76.1 out of a maximum of 100 while Australia scored 75.3, Sweden 74.3 and Canada 73.3. Japan, China and Germany were bottom of the ladder.

But when it comes to the adequacy of retirement incomes, Australia slips to fourth place with just 68 out of 100.

Knox says the Netherlands and Canada come out tops in the hip-pocket stakes due to a higher minimum level of age pension, high retirement incomes from a mix of public and private pensions and that part of all retirement benefits must be taken as an income stream.

Under the Australian system, people can take all or part of their superannuation as a tax-free lump sum from the age of 60, a situation many of the submissions to the Henry tax review regard as unsustainable.

“If you don't have to take super as an income stream, you are not maximising the system. We say part of the total super benefit should be taken as an income stream, which gives some certainty and protection from the risk of outliving your savings,” Knox says.

“Some countries don't allow lump sums; we don't go that far because people often do need access to their capital for health reasons or to set themselves up for retirement.”

Knox acknowledges that many retirees already live frugally because they worry about living to 90 and their money running out. He recommends giving retirees the chance to purchase some form of deferred annuity that would kick in at age 85 to 90 when their other sources of private income run out.

Australia scores more highly for the sustainability of our system, that is, the ability to support an ageing population from a combination of private pensions and social security.

Knox attributes this to Australia's high participation rate in super, the high level of super assets as a percentage of GDP and strong population growth.

More than 90 per cent of the Australian workforce is covered by super compared with less than 60 per cent of workers in the US and Britain, where the minimum age pension provides less than 20 per cent of the average wage.

Yet Knox says there is a strong argument Australia will be unable to provide adequate retirement income for most Australians, even when the super system matures.

The report recommends increasing the level of mandatory super contributions, preferably with some participation from employees.

While Australia has a 9 per cent employer-contribution, this is subject to a 15 per cent contributions tax, which leaves less money in individual super accounts earning compound interest.

By comparison, Hong Kong has mandatory contributions of 10 per cent, half coming from employees and half from employers. Singapore has a central provident fund with high contribution rates from employers and employees but members can draw some of the funds for housing and medical expenses as well as retirement.

The report also recommends continuing to review the pension age, preferably by some automatic link to life expectancy to take decision-making out of the hands of politicians.

Australia, the US, Denmark and Germany are in the process of lifting the retirement age to 67, while Britain is upping the ante to 68.

But so far, only Denmark has indexed the pension age to longevity.

Australia could also do more to raise the labour force participation rate among older workers. “Australia is low on the world rankings – Sweden has double our participation rate at age 55 to 64 and the US and Britain are also higher,” says Knox, who believes that the reasons for this are partly cultural, partly government encouragement and partly due to employer attitudes.

“By continuing to work longer and not drawing on your super there are potentially big benefits to working longer, at least part-time,” he says.