To Solve the U.S. Retirement Crisis, Look to Australia
We can start aiding our retirees' finances by taking tips from Down Under
You know that “retirement crisis” America’s facing? (More than half of U.S. households risk being unable to maintain their standard of living in retirement. … Social Security is due to run short of money by 2033. … About a third of workers aren’t offered retirement plans. …)
Now imagine living in a country where all employees are covered by an employer-sponsored retirement plan. Where the government equivalent of Social Security is generous. Where people don’t tap their retirement funds early, as many Americans do, running the risk of depleting their savings. Where the savings rate is 10 percent.
Say G’day to Australia.
What Australia Is Doing Right
Lately, I’ve been hearing a lot about Australia’s highly rated system (tied with the Netherlands for the second best in the world, behind Denmark, according to the Melbourne Mercer Global Pension Index). So I decided to find out more about it and see what America could learn from our friends Down Under. Turns out that if we take a page or two from Australia’s playbook, we might be able to junk the phrase “retirement crisis” when talking about what we'll face when we stop working full-time.
(MORE: Hiring Older Workers: Two Intriguing Ideas From Abroad)
There are three pieces in Australia’s retirement system:
The Age Pension That’s their version of Social Security and it pays up to about $28,000 a year to people roughly 65 and older. (The age is scheduled to rise to 67 in 2023). Australians don’t pay into the system as we do with Social Security; the money comes from the government’s general revenues.
Unlike Social Security, the Age Pension is means-tested; benefits are reduced for Australians with high incomes or substantial assets, using a sliding scale. About 56 percent of people get the full pension; the rest get a reduced version.
Qualifying for the Age Pension also entitles recipients to valuable government-provided benefits, like discounted prescription drugs and transportation expenses.
A mandatory retirement saving program known as The Super (short for Superannuation Guarantee) This is the lynchpin to Australia’s retirement system. With The Super, employers are required to contribute into tax-advantaged retirement plans, like 401(k)s, 9.25 percent of earnings for virtually all employees age 18 to 70. That percentage will gradually rise to 12 percent by 2020. Employees choose where to invest the money.
Earnings are taxed 10 percent as they accrue and there’s a 15 percent capital gains tax on profits from investments held more than a year. But as with America’s Roth IRAs, retirement withdrawals are tax-free. Australians can begin taking the money at 55, if they’re retired.
Unlike 401(k)s, loans from the Saver aren’t permitted and pre-retirement withdrawals are generally forbidden. (One reason Australia could get away with these tough rules: its public health system prevents residents from getting socked with huge medical bills, as can happen in America.)
Voluntary savings Employees can contribute to The Super on their own, but just 20 percent choose to do so, according to Julie Agnew, author of the Center for Retirement Research at Boston College article “Australia’s Retirement System: Strengths, Weaknesses, and Reforms.”
Australians can also save for retirement and for other purposes outside of work. Many do, which explains the 10 percent saving rate.
Overall, Australia “has done a really great job,” says Allison Schrager, a New York City-based economist who wrote about the system for the website Quartz.
How Australia Got Serious About Retirement
But it wasn’t always so.
“In the 1980s, our retirement-plan coverage was similar to what is in the U.S. now,” says David Knox, senior partner for Mercer and author of the firm’s annual global retirement report. “A little less than half the workforce was covered by pension plans.”
Realizing this and fearful that an aging population would strain Australia’s Age Pension system, the government and unions got together to create The Super. Initially, employers had to kick in 3 percent of pay.
The key was that, unlike in the United States, all employees would be covered. “It didn’t matter if you employed one person or 10,000 people,” Knox says. There’s no Super for self-employed people, however.
“In the United States, your retirement coverage and how much you can set aside depends on what your employer offers," says Arthur Noonan, a Mercer senior partner based in Pittsburgh. "We’ve made it more difficult than it needs to be."
There’s one hidden catch with The Super’s mandatory employer contributions: employees get lower pay and smaller raises than they would otherwise, since the money has to come from somewhere. “Instead of wages going up by one and a half percent a year, they’ve gone up between one-half and one percent,” Knox says.
Australia's System Isn't Perfect
And for all the beauties of Australia’s retirement system, I wouldn’t call it perfect. Mercer’s index bestowed a B+ grade (much better than America’s Gentleman C, however).
For one thing, I don’t think all the onus should be on the government and employers. Individuals ought to be required to save for retirement, too – or at least have contributions automatically taken out of their pay unless they choose to opt out. “If I was to design the system from scratch, I’d have the employees contribute,” Knox says.
To make the program truly uniform, the self-employed should also have access to The Super.
Another flaw: If Australians annuitize their Super accounts and receive monthly installments over their lifetimes, the money can run out if they live too long. This makes older Australians “heavily exposed to longevity, inflation and investment risks,” Agnew wrote.
Schrager also bemoans the ability to game the Age Pension by making sly money moves. For instance, housing wealth isn’t counted in the asset test, so Australians in their 50s are taking on more housing debt than ever, she says, then paying it off with their Super.
“There are some issues with the Australian retirement system, but they’re relatively easier to fix than the ones we’re facing here,” Schrager says.
There’s no denying Australians are in better shape for retirement than Americans.
What America Can Learn
Could their system work here?
Well, there’s zero chance that Congress and the president would require employers to offer retirement plans then contribute to them on behalf of their employees. So I doubt we’ll ever get close to Australia’s broad coverage.
And I’m not expecting Social Security to get means tested anytime soon, since too many Americans would squawk about not getting their benefits after paying into the system.
But if we won’t require firms to put away retirement money for employees, why not do the next best thing and make the ones that offer plans automatically enroll staffers unless the workers choose to opt out? Better still, require the plans to feature auto-escalation, so the percentage that employees save goes up each year.
“We could get a lot more saving by opting people into retirement plans with the option to default out,” Schrager says.
The push for mandatory auto-enrollment and auto-escalation has been growing lately, with the strange bedfellows of AARP and the U.S. Chamber of Commerce embracing it, along with a number of financial services firms.
Reuters’ Mark Miller recently noted that, according to Putnam Investments, employees who are automatically enrolled in workplace plans are on track to replace 91 percent of their pre-retirement income in retirement and those in auto-escalation plans are headed to 95 percent replacement rates.
Maybe we can’t easily spread retirement joy like Nutella. But it’s time to stop decrying America’s flawed retirement system and start fixing it.