The former midfielder believes serious improvement is needed for them to challenge.
The Reds are coming along nicely under the leadership of Jurgen Klopp, with two impressive performances in the last week alone.
They started with a solid 1-1 draw with Tottenham Hotspur last Sunday, before achieving the same scoreline against Borussia Dortmund in the Europa League on Thursday night.
Expectation is high for next season once Klopp has worked on the team in the summer and Merson believes four signings would be needed to make them challengers.
"I think they’d have to buy four players," he told Soccer Saturday.
"Tottenham would have to buy a couple of very good squad players, [whereas] Liverpool would have to buy four players that are going to start and play in the team.
"But it is getting better and I think that goes down to the manager. I just think he’s starting to stamp his authority on the team."
Where Klopp will look to improve the team is certainly going to be interesting viewing.
Central defence may be chief among his thoughts and he has already moved to improve that area by securing the summer signing of Joel Matip from Schalke.
Elsewhere, left-back is another area needing improvement, with Alberto Moreno struggling this season. And, of course, there's the goalkeeper...