Mandatory Savings: How Australia Fixed a Retirement Crisis

The land down under has gotten on top of their retirement-savings crisis through a system of mandatory savings accounts. The U.S. is sure to give them a look

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We can learn a lot about staying on top of our long-term financial security by studying the land down under.

Australia was among the earliest to get serious about financial education, establishing a financial-literacy foundation in 2005 — before the financial crisis. It also has a retirement system that is regarded as among the best in the world.

The U.S. is struggling on both fronts. We were early to formally embrace financial education, having established a Financial Literacy and Education Commission in 2003. But Australia has steamed ahead, requiring a personal-finance class for graduation throughout its school system. In the U.S., just 14 states require that such a course even be offered as an elective.

Increasingly, financial education is becoming a global initiative. The hope is that by raising the financial IQ of individuals around the world, the economy won’t fall victim to another financial crisis — at least not one caused by basic misunderstanding of things like mortgages and credit-card terms. It’s a long-term approach.

The real Aussie edge, though, may be a retirement system that “has achieved high individual saving rates and broad coverage at reasonably low cost to the government,” according to new research from Julie Agnew for the Center for Retirement Research at Boston College. Australians do this through a three-pillar system that starts with private savings. The system also includes a safety net that resembles Social Security, though benefits are means-tested and disappear past a certain income threshold. In the U.S., means testing faces stiff opposition, though some argue that effectively it is already in place.

The key difference is Australia’s employer-based savings accounts, which resemble a 401(k). Employers are required to fund every worker’s account with 9% of pay, rising to 12% of pay in 2020. Over 90% of working Australians have savings in such an account. In the U.S., fewer than half of workers have money in a 401(k) or similar plan.

In her research, Agnew found that Australian plans are more likely to have automatic enrollment and contribution-escalation provisions, which are proven to boost participation and savings. Australian plans also include more advice and impose a fiduciary duty on anyone advising a plan participant. The country also has tighter restrictions on taking early distributions, known as leakage.

A mandatory employer-funded savings component is on the radar in the U.S. Alicia Munnell, director of the Center for Retirement Research, recently floated the concept as part of sweeping reform.

Retirement issues are a global concern. In one of the more unusual strategies for shoring up retirement security, the British food company Dairy Crest has transferred 44 million lb. of cheese to its pension. That sounds yummy. But something like the Australian system sounds better.

8 comments
walstir
walstir

Mandatory savings might be a good idea in theory; but they create a real temptation for governments in trouble.  In that case, the government is likely to argue that the ‘safest’ place for its citizens savings is in the form of loans to the government, which just ends up being a roundabout way of increasing government debt.  Argentina has already seized its own citizens saving to ‘protect’ them.  Even without outright seizure, governments can use inflation to gradually capture savings for their own use.

ZacPetit
ZacPetit like.author.displayName 1 Like

Mandatory savings smells a lot like a "father knows best" state in action. Even if it turns out to be beneficial, US citizens will reject it.

lachlanwells1990
lachlanwells1990

@ZacPetit Uhh, how is payroll-funded retirement any different? The difference is the funds are NOT controlled by government, also something I have assumed Americans get hot and bothered about...

JWinn0331
JWinn0331

@TIME @TIMEBusiness USA needs to start. It makes no sense that high school grads don't understand anything about interest, credit and loans!