Would Australia’s Superannuation Model Work for the U.S. Retirement System?

As economic experts continue to debate how best to encourage Americans to increase their retirement savings, many are taking a closer look at Australia’s national retirement system. Why? Australia utilizes a superannuation system (or mandatory pension plan) that requires employers to contribute 9% of workers’ salaries toward retirement accounts. According to AMP Financial Services, this model eventually will allow Australians to retire with over $550,000 in assets – nearly five times the size of the average American worker’s retirement. But would components of this Australian model actually work if applied to the U.S. retirement system? Some reformists actually think so.

The Australian superannuation model is widely considered one of the most innovative retirement systems in the world. In addition to the mandatory employer contribution, the system prohibits most access to superannuation funds prior to retirement, and the contribution limits are far above those in the U.S. Because the 9% mandatory employer contribution is fairly new, the system includes a “catch-up” subsidy of $450,000 over three years for workers over 50 years of age. Also, the system is bolstered by a national aged pension social insurance system that, unlike the U.S. Social Security system, does not base eligibility on how long each citizen has worked.

The success of this system has prompted significant discussions regarding the disparities between it and the U.S. retirement system. In fact, the New American Foundation, a nonpartisan public policy think tank, recently held a panel discussion to take a closer look at the Australian model and debate the implementation of similar measures in the U.S. During the meeting, Retirement Solutions President Jane White proposed a similar system that would require companies with 10 or more workers to contribute 9% of pay into employee accounts. The proposal includes features such as realistic catch-up contributions and government matches for companies with less than 10 employees. However, as other panel members pointed out, the implementation of such measures would not be an easy task.

With an extensive social insurance system already in place, mandating an additional 9% in employer contributions could incur significant backlash. Even with matching government funds, many smaller employers would find it difficult to remain profitable with such measures. Further, implementation would require significant bipartisan cooperation among U.S. policy makers – and that is a difficult task in itself given the way Democrats and Republicans have been divided over approaches to increasing American retirement investments. And what of the thousands of employers with 401(k) plans in place? Would such a system cause these plans to become obsolete overnight?

Because of its success, the Australian superannuation model will continue to generate discussions on how to fix our retirement system. But if we are ever to see any realistic change that would mimic the Australian program, it would be very gradual – if at all.

For more information on this topic, please click on the following links…

Should the U.S. Mandate Private Pension Saving?

U.S. Retirement System Should Look Down Under

Replicating Australia’s Retirement System Could Fill America’s Empty Nest Eggs

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December 19, 2008

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