Australia rising to the retirement challenge

Robert L. Reynolds

Countries around the world face multiple economic challenges including sluggish growth and high sovereign debt, while at the same they confront another challenge: meeting the needs of an aging population.

Birth rates continue to decline while people are living longer. The world's population is aging more rapidly than ever before and by 2050, individuals older than 60 will outnumber children younger than 15.

The United States has plenty of company in facing the retirement savings challenge. But in many studies, we lag other developed nations, such as Denmark, the Netherlands, and Australia, in retirement savings. In fact, the U.S. earned a grade of "C" in the last Melbourne Mercer Global Pension Index. As we move toward innovation, it may be helpful to look beyond the United States to see what is working. Sources: Australian Centre for Retirement Studies, Mercer; October 2012. Learning from Australia Australia's national retirement has often earned high marks. The Superannuation Guarantee - Australia's mandatory, defined contribution system - offers universal coverage to all workers.

  • Employers - not workers - are required to contribute at a mandated rate of 9.25% of earnings, with the rate rising to 12% by 2020.
  • Workers can voluntarily contribute.
  • Earnings are taxed, but the system offers tax-free withdrawals in retirement.
  • Withdrawals before retirement are limited to relocation, disability, illness, or hardship.
In addition, Australia offers an Age Pension program, similar to Social Security in the United States, but one that pays retirees a flat benefit from general tax revenues. The pension varies, based on a means-tested sliding scale of need.

Two decades of growth Australia's Superannuation assets totaled $1.62 trillion in June 2013. The National Institute on Retirement Security estimates that Australians with an average salary may replace 50% or more (52.6% for men; 50.1% for women) of current salary in retirement just from mandatory programs, not counting other voluntary savings.

Compare that with an average earner in the United States relying on Social Security, with an estimated 42.3% income replacement rate.

Common challenges, differing solutions Many developed countries offer multi-faceted retirement systems. As Mercer points out, since the global financial crisis, countries have embraced a range of solutions to meet the savings challenges of an aging population including reforming the delivery of public pension benefits, such as raising the retirement age, and supporting policies that grow the working population.

Numerous studies in the United States illustrate how defined contribution plan design features like automatic enrollment as well as federal tax incentives that encourage savings have contributed to individual retirement preparedness.

Of course, not all systems can function similarly, but some common elements exist. Successful countries have a system that integrates public and private contributory programs, and optimizes access to retirement savings plans for all workers. At the end of the day, innovation to meet the retirement saving challenge in the United States will only be driven by public and private collaboration and commitment.