As one of the youngest developed countries to receive full independence, Australia has made impressive marks on the world economy and financial markets. Among its most notable financial achievements is its national retirement savings system, which has been implemented extremely well since its inception in the early 1990s.
Australia’s success is no secret. Its retirement model has been widely praised for its high per-capita savings rates and its excellent strength. Countries around the world are looking at their culture of retirement planning and taking note.
Australia’s retirement model is widely praised for its high per-capita savings rates and excellent stability, and countries around the world are taking note.
The Australian System
The Australian retirement system consists of three branches that can provide retirement income: a government-managed Age Pension, mandatory “superannuation” planning and voluntary savings.
The first branch is the government’s Age Pension. The Australian Age Pension is similar to U.S. Social Security program. It is a government-mandated tax that supports the elderly and individuals with disabilities. The Age Pension is needs based, allowing the government to limit spending on individuals with secure finances and provide additional funds to those with greater financial challenges.
The central (and most distinct) branch of the retirement system is the “superannuation” program. In short, Australian superannuation is a requirement that Australian employers put 9 percent of their employees’ wages into tax-advantaged retirement accounts. Unlike the Age Pension program, the accounts are not publicly funded pools and do not restrict employees to government managed investments.
Essentially, superannuation can be thought of as a compulsory 401(k) program; the accounts are private, but there is a government requirement to use them. With this method, the Australian government hopes to guarantee that all citizens will have enough savings to fund successful retirements on their own.
The final branch of the Australian retirement system is voluntary savings. Workers are free to save beyond the requirements of superannuation if they would like to. Extra funds can be added to the tax-advantaged superannuation accounts (up to a certain limit) or placed in personal investment accounts.
Successes
So far, the Australian system has proven to be wildly successful. The superannuation program has catapulted the country to the upper ranks of retirement leaders. The private savings rate in Australia is among the highest in the world; and with the superannuation rate set to increase to 12 percent by 2020, it shows no signs of slowing down.
Australia also owes some of its success to its ambitious retirement investments, its considerable economic growth and its industries’ strong performance following the 2008 financial crisis. It is hoped that the increased superannuation rates will help secure Australians’ retirements even if future markets are less successful than their current average.
Problems
As with any large program, there are some potential issues with the Australian system. The most notable concern is the economic drag it places on the economy during a recovery. Mandatory savings of 9-12 percent may be acceptable during a normal economy, but if Australian consumer demand drops significantly, the government may be forced to lower the rates temporarily to encourage consumption and domestic spending.
Additionally, the Australian Age Pension has met many of the same problems as U.S. Social Security. The Age Pension program is currently projected to be underfunded in the coming years; however, the superannuation plans are designed to help alleviate citizen dependence on Age Pension. Some have also criticized the pension, which is based on need, for incentivizing retirees to spend their savings quickly to gain a higher pension rate (such criticisms are speculative).
It is important to note that the superannuation branch of the system has only existed for about 20 years (only 10 of which has required 9 percent savings). Though the program has been successful so far, it is difficult to predict all the challenges it may face in the future.
Australia and the United States
As it stands today, Australian savings (per capita) have greatly surpassed those of average Americans. Over 50 percent of the U.S. workforce does not have access to a 401(k) plan, and not all of those with access make use of it. Of the portion of the population that does use a 401(k), the average contribution rate is only about 3 percent.
By comparison, Australia has 90 percent participation in a program that requires at least a 9 percent contribution rate—and even that has proven unsatisfactory, as they are transitioning to a 12 percent program.
Clearly, there is a problem with U.S. savings rates. But what should the United States do? Australia (and other countries) have shown that mandatory savings rates can be successful, but many question whether such plans could work in the United States. Even if it could be organized for the population (the United States is more than 14 times the size of Australia), many Americans tend to disapprove of government programs and regulations.
The message from Australia is simple: the demands of retirement are significant. Whether the government requires saving plans or not, preparing for the costs of retirement is never an easy task. All workers must understand the magnitude of their future needs and try to secure their finances accordingly.
The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. Fingerlakes Wealth Management does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. This article was written by Advicent Solutions, an entity unrelated to Fingerlakes Wealth Management. ©2013 Advicent Solutions. All rights reserved.
