Why Our Retirement System Should Be More Like Australia’s

More than 90 percent of employed Australians have retirement savings in government-mandated accounts.

An elderly couple walk down the street on May 13, 2014 in Melbourne, Australia. 
National Journal
Nancy Cook
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Nancy Cook
July 1, 2014, 8:22 a.m.

Be­fore 1992, the Aus­trali­an re­tire­ment sys­tem looked pretty sim­il­ar to the way people ap­proached re­tire­ment in the United States. “Only a few people re­ceived good re­tire­ment pro­grams — people who worked for com­pan­ies or the pub­lic sec­tor. Large groups of the pop­u­la­tion had no cov­er­age at all,” says Jeremy Duf­field, chair­man of the Aus­trali­an Centre for Fin­an­cial Stud­ies, an aca­dem­ic think tank.

Now, more than 90 per­cent of em­ployed Aus­trali­ans save money for re­tire­ment every year in ac­counts that are man­dated by the gov­ern­ment. These ac­counts rep­res­ent roughly $1.6 tril­lion in sav­ings for the Aus­trali­an eco­nomy as of June 2013, ac­cord­ing to a re­port by De­loitte. That’s a huge amount of pro­gress over just 22 years — and that’s in ad­di­tion to Aus­tralia’s pen­sion pro­gram, which is sim­il­ar to So­cial Se­cur­ity, as well as people’s own sav­ings.

The Aus­trali­an sys­tem, with its three-pronged ap­proach, also of­fers a mod­el for the U.S., es­pe­cially as the coun­try faces the im­pend­ing re­tire­ment of the baby-boomer gen­er­a­tion and the fact that baby boomers, Gen­er­a­tion Xers, and mil­len­ni­als are at risk of not ac­cu­mu­lat­ing enough cash to sus­tain their life­style as they age. 

So how did Aus­tralia do it? Well, in 1992 the Aus­trali­an gov­ern­ment cre­ated a third leg of re­tire­ment sav­ings, called the “Su­per­an­nu­ation Guar­an­tee” pro­gram. It re­quired em­ploy­ers to con­trib­ute 9 per­cent of an em­ploy­ee’s earn­ings in­to a re­tire­ment ac­count for all work­ers between the ages of 18 and 70. Em­ploy­ees pick which fund they want the cash in­ves­ted in, like a mu­tu­al fund or a pub­lic-sec­tor group. On av­er­age, Aus­trali­ans between the ages of 60 and 65 have roughly $170,000 in Aus­trali­an dol­lars in these ac­counts, says pro­fess­or Susan Thorp, chair of fin­ance and su­per­an­nu­ation at the Uni­versity of Tech­no­logy in Sydney. The amount of money saved per re­tir­ee is only ex­pec­ted to in­crease as this part of the Aus­trali­an sys­tem ma­tures.

Aus­trali­ans also lean on two oth­er meth­ods to ac­cu­mu­late re­tire­ment cash: vol­un­tary sav­ings (which only about 20 per­cent of eli­gible people, mostly high-in­come earners, take ad­vant­age of) and a means-tested gov­ern­ment pen­sion pro­gram that has ex­is­ted since 1908. The lat­ter of­fers very ba­sic pay­ments to people age 65 and over who qual­i­fy, with the be­ne­fits re­duced or elim­in­ated high­er up on the in­come lad­der. Thorp es­tim­ates that about 75 per­cent of Aus­trali­an seni­ors re­ceive at least a par­tial means-tested pen­sion.

Over the past five years, the Aus­trali­an gov­ern­ment has tweaked the pro­gram. The man­dat­ory con­tri­bu­tion that em­ploy­ers must make to the su­per­an­nu­ation guar­an­tee pro­gram will rise to 12 per­cent by 2020. The eli­gible age to col­lect the means-tested pen­sion is also sched­uled to rise over the next dec­ade to 67.

The Aus­trali­an re­tire­ment sys­tem does have some flaws. Chief among them is a low level of fin­an­cial lit­er­acy among Aus­trali­ans, which means that people do not al­ways pay enough at­ten­tion to the way their money gets in­ves­ted or to any high fees as­so­ci­ated with par­tic­u­lar funds. “It’s very much an in­di­vidu­al choice mod­el, so there is a lot of re­spons­ib­il­ity on the part of the in­di­vidu­al, like the 401(k) mar­ket in the U.S.,” Duf­field says.

Still, the Aus­trali­an sys­tem of­fers two key takeaways for Amer­ic­ans as we grapple with the long-term prob­lems of leav­ing the re­spons­ib­il­ity for re­tire­ment sav­ings in the hands of in­di­vidu­als:

  • The man­dat­ory ele­ment: The Aus­trali­an gov­ern­ment man­aged to en­sure that a great­er share of its pop­u­la­tion was covered for re­tire­ment by re­quir­ing em­ploy­ers to par­ti­cip­ate and con­trib­ute to the sav­ings plan. That’s a huge con­trast to the U.S., where only about half of work­ers re­ceive cov­er­age through their em­ploy­ers or in­sti­tu­tions; that man­dat­ory ele­ment, ex­perts agree, is key to in­creas­ing the cov­er­age.
  • Re­stric­tions on with­draw­als: Aus­tralia also im­poses very strict rules on when res­id­ents can with­draw money from their su­per­an­nu­ation re­tire­ment ac­counts. That stands in stark con­trast to the troub­ling U.S. trend of people us­ing their 401(k)’s as de facto piggy banks for loans, col­lege tu­ition, or a stop­gap fol­low­ing a job loss. The re­stric­tions also en­sure that Aus­trali­ans end up with a real pot of money to tap in­to in their mid-60s.

The biggest hurdle to ad­opt­ing some of ele­ments of the Aus­trali­an sys­tem in the United States is polit­ic­al. “This took tre­mend­ous gov­ern­ment and polit­ic­al will,” Duf­field says about the Aus­trali­an sys­tem. Aus­trali­an politi­cians con­tin­ue to fight over the tweaks to the sys­tem. “Just look at how hard it was to cre­ate Obama­care,” he says. “I do not see the U.S. put­ting in a com­puls­ory sys­tem.” 

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