A retirement lesson from Australia
Americans generally don't save for their golden years; down under, the government requires it.
By Kelly Candaele, Kelly Candaele is a trustee of the Los Angeles City Employee Retirement System. He spoke recently at a pension fund conference in Sydney.
March 25, 2007
Sydney, Australia — AMERICANS and Australians have a lot in common. Australians are open and friendly in ways that Americans recognize, and both cultures are mad about sports. Sydney cricket fans have been abuzz because national team captain Ricky Ponting has scored 557 runs in three test matches this year. You figure it out.
But one of the big differences in our respective social systems is the way we plan for retirement: Americans generally don't, while it's now obligatory for most Australians.
In 1992, after a long political struggle led by the Australian labor movement, a compulsory retirement savings plan was established. In its simple outline, employers are required to contribute 9% of a worker's wages into a retirement plan. Employees can also voluntarily add to those contributions. As a result, Australians have more money invested in managed retirement funds per capita than any other economy in the world.
By contrast, the United States faces a retirement crisis. Social Security, the central pillar of our retirement system, will replace only 30% of pre-retirement income for those who qualify. Defined-benefit plans — those that guarantee a pension amount based on salary and years of service — are being abandoned in the private sector and are under attack in the public sphere by conservative ideologues and taxpayer advocates.
Michigan and Alaska have closed some of their public employee defined-benefit retirement plans to new hires, and other states are threatening to do the same.
In the private sector, employees who have devoted themselves to their companies — firms such as Delphi, an auto parts supplier that used to be a part of General Motors and recently declared bankruptcy — are increasingly finding that assured pension promises are being threatened in bankruptcy proceedings.
And 401(k) plans — retirement funds to which both employers and employees contribute — are woefully under-funded. Employers contribute on average up to 3% to such employee "defined-contribution" plans (in which retirement benefits depend on fluctuations in the financial markets). Although many employers agree to "match" the contributions their workers make, declining real wages and extensive personal debt (how many credit card applications do you get each week?) make it difficult for employees to make their maximum allowable contributions. As a result, 50% of private-sector employees have no retirement plan at all outside of Social Security.
According to Mavis Robertson, one of the founders of the Australia model, the difference between the American approach to retirement and the Australian one is partly a function of political culture. "We had a Labor Party government in the early 1990s, and we made a collective decision to move for a broad-based, compulsory system," she said. "Otherwise we'd be in the same place as Americans, trying to persuade workers that they should save more."
The Australian system is not perfect. Because there is not an automatic transfer of the accumulated personal funds into a retirement annuity that would provide a monthly stream of payments, many retirees take their money when they retire and take expensive trips or buy inflated real estate.
But one of the crucial achievements of the Australian model is that younger people, women and minorities — those most often excluded from pension participation in the United States because they disproportionately work for employers who don't provide retirement benefits — are the ones who have gained the most.
An added feature of the Australian system is that many of the funds in which retirement savings are invested are professionally managed and run as nonprofit co-ops. Profits go back to the fund, and there are no commissions paid on stock trading.
The American system is a stark contrast. John Bogle, the founder of Vanguard Group mutual funds, wrote a book last year called "The Battle for the Soul of Capitalism." It provided a devastating indictment of the industry he helped create (and which invests close to 40% of the country's 401(k) contributions). He put his case bluntly: "The more the [mutual fund] manager takes, the less the owner makes." The "owners," or individual investors, are the people fund managers are supposed to work for. But according to Bogle, while assets being managed have multiplied by 1,595 times since 1950, expenses and manager fees have multiplied by 2,445 times. And the vast majority of mutual funds don't even beat the broad market.
With the shift to a Democratic majority in Congress, a new focus is taking place regarding retirement. California Rep. George Miller of Martinez chairs the House Education and Workforce Committee, which has jurisdiction over private-sector pension plans. Miller has already held a hearing on the 401(k) industry and promised to craft legislation to fight hidden or excessive fees.
And organized labor, which represents only 8% of the private-sector workforce, is strategizing about how best to meet the retirement needs of the tens of millions of workers who are facing poverty in retirement. Both the AFL-CIO and Change to Win, the group of unions that split from the AFL-CIO last year, have looked at the Australian model for insights. Both organizations are looking at mandatory employer contributions, pension portability from one job to another and low-cost administration as potential solutions.
All of the Democratic presidential candidates have focused on healthcare as our most crucial current and future problem — and rightly so. But the percentage of our population that will be over 65 years of age will increase by 20% over the next 30 years. If we ever fundamentally reform our dysfunctional healthcare system, the retirement crisis will immediately rise to the top of our political agenda. When it does, we just might be talking about what we do with an Australian accent.