In Australia, Retirement Saving Done Right
When President Barack Obama delivered a speech to Australia’s Parliament in late 2011, he joked about bits of slang he’d picked up Down Under, including “earbashing”—the tendency to go on and on about a topic. “I really do love that one, and I will be introducing that into the vernacular in Washington,” the president said, to laughter.
Here’s another Aussie term D.C. lawmakers should get to know: superannuation. That’s what Australia calls its retirement savings system, which in just two decades has become one of the most highly regarded in the world. Since its introduction in 1992, the Superannuation Guarantee program has grown to $1.52 trillion, more than the country’s gross domestic product, with more than 90 percent of workers putting money into the system. By comparison, Americans have about twice that, $2.8 trillion, in their 401(k) accounts, with a population 14 times larger. “I believe that superannuation is as much a source of national advantage and pride as the Australian Olympic team,” Bill Shorten, the minister in charge of the program, said last year. “Super” funds supplement the national pension, a means-tested program funded by taxes that provides benefits to three-quarters of people over 65.
In the Melbourne Mercer Global Pension Index, an annual study that ranks national retirement systems on such measures as tax incentives, sustainability, and regulation, Australia lags only Denmark and the Netherlands. The U.S. is ranked ninth, with Mercer researchers faulting American 401(k) rules that allow savers to borrow from their accounts and take penalty-free distributions as soon as they reach age 59½.
Just 40 percent of Americans who worked in 2011 participated in an employer’s retirement plan, according to the Employee Benefit Research Institute. U.S. workers also have a bad habit of liquidating their accounts when they change jobs, instead of rolling them over, and paying high taxes for the privilege. Only 13 percent of American workers say they are “very confident” they will be able to live comfortably in retirement, according to a March EBRI survey in which 57 percent of respondents reported having less than $25,000 in savings. “As a country, we are woefully underprepared for retirement,” Senator Tom Harkin (D-Iowa) wrote in a report last year. It said there is a $6.6 trillion gap between what Americans have saved and what they will need, and that the traditional three-legged stool of company pensions, personal savings, and Social Security “has become increasingly wobbly as pensions have disappeared and the middle class is finding it harder to save.”
What makes Oz so different? For Australians, not saving is simply not an option. The 1992 law required employers to divert 3 percent of most workers’ salaries into retirement accounts, and the level has been raised over time as the public has gotten used to the idea. Nine percent of virtually every paycheck now goes into these Super funds, and it will be 12 percent by 2020. One in five employees saves even more with voluntary contributions known as “salary sacrifice.” Some companies match workers’ contributions. Both contributions and investment earnings on them are subject to a 15 percent tax. That’s a lower rate than almost all workers pay in income tax. Withdrawals by people 60 and older are tax-free.
“It’s carrot and stick, basically,” says Jeremy Duffield, chairman of the Australian Centre for Financial Studies. “The carrot was you’d get some tax concessions for contributing to a Super. The stick was you had to do it.” Duffield was in the middle of a 30-year career at Vanguard when he returned to his native Australia in 1996, as the superannuation industry was taking root, to found Vanguard Investments Australia. Today about half of workers choose to have a money manager like Vanguard or Fidelity Investments manage their Super funds, but more participants are doing it themselves. The number of people in self-managed Super funds has grown 74 percent since 2004, and their assets have surged 244 percent, to A$439 billion ($422 billion).
Total savings are on pace to hit A$1.8 trillion by 2017. On top of their intended payoff in the future, the inflows pay a more immediate dividend now, says Susan Thorp, a finance professor at the University of Technology Sydney. “If you have people making regular contributions from their wages, there’s always this steady stream of inflows into the capital markets,” she says. “It’s money that comes into the market to purchase securities regardless of conditions.” That has helped stabilize the Australian economy, which avoided a recession during the global financial crisis.
Partly because it’s a young system focused on growth, Australians’ Super funds are heavily weighted toward stocks, with only 23 percent allocated to cash and fixed-income investments, according to the Australian government. Americans have a third of their 401(k) accounts in bonds, money-market funds, and other stable investments, according to the Investment Company Institute. The imbalance has worked out well for Australians this year, with soaring global stocks set to give Super funds their second-best performance on record, but it creates what retirement experts say is unacceptable volatility. The heavy reliance on stocks “has profound implications for a retirement system that has so far seen itself as an accumulation system,” wrote Jeremy Cooper, chairman of retirement income at Australia’s Challenger investment management firm, in a recent report. More than $900 billion needs to be shifted into safer securities over the next 20 years, he says, to protect the savings of workers nearing retirement from a sudden stock market plunge.
Altering the U.S. system to compel additional savings would be difficult at any time, and especially in a fragile recovery with high unemployment, where one man’s prudent retirement allocation is another’s take-home pay cut. In July, Harkin, the chairman of the Senate pensions committee, proposed a new kind of savings vehicle called Universal, Secure and Adaptable (USA) Retirement Funds. Employers could offer these plans without taking on the burden and legal risks of administering them, and employees would be “automatically enrolled”—a more palatable American phrasing for what the Aussies bluntly call “compulsory” savings. Harkin didn’t say what portion of pay would be targeted, and workers would be free to opt out or reduce their contributions at any time.
Larry Fink, chief executive officer of BlackRock, the nearly $4 trillion asset manager, endorsed the Australian model in a lecture to business school students at New York University in May. “Superannuation has been a huge success in supplementing the government pension scheme and taking the strain off it—an attractive prospect as we think about how to relieve the burden on Social Security in this country,” he said. “The current system is broken, and we need a comprehensive solution to retirement savings that includes some form of mandatory retirement savings.” As Fink continued, he piled up more compelling arguments and data points. Some might have even called it earbashing.