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)

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."