Looking to Australia for Innovations in Retirement Security

Last week, the Brookings Institution’s Retirement Security Project and AARP Public Policy Institute co-hosted an event exploring the retirement savings systems of Australia and a range of other countries in Asia and Europe, with the goal of identifying lessons for the ailing American system. Gary Koenig, Director of the Economics Team at AARP PPI, framed the event by noting that the U.S. retirement system is “not working well enough for enough workers.” Further, although inadequate retirement savings is an “international problem,” other nations’ success with features like automatic enrollment and even mandatory savings may offer some useful models as the U.S. strategizes about how to address its own system’s shortcomings.

Nick Sherry of the Australian Department of the Treasury kicked off the event by providing an overview of Australia’s retirement system, which consists of a basic, means-tested state pension supplemented by mandatory savings in defined contribution (DC) plans. As in the U.S., the prevalence of declined benefit (DB) pensions has declined significantly in Australia in recent decades. Compulsory savings of 3% of a worker’s income was first introduced in 1987, and increased to 9% over the course of ten years beginning in 1992. Recently, Parliament voted to increase the required contribution to 12% by 2020.

Australia’s program, known as the Superannuation Guarantee, has by most metrics been remarkably successful, with over 90% of the workforce participating and accumulating savings that amount to more than twice the country’s GDP. By contrast, in the U.S., only around 40% of workers were enrolled in a 401(k) in 2011, due to both inadequate access to plans and low rates of voluntary participation. And according to Sherry, Superannuation’s approval rate among Australians has never fallen below 80%, though some have recently expressed concern about the impact of the increase to 12%, particularly on younger workers and others with a need for greater liquidity.

Australia isn’t alone in requiring workers to save – Switzerland employs a similar scheme, requiring equal contributions from employers and employees, explained David Harris of Tor Financial Consulting. The rate of the compulsory contributions increases with age. Yet many countries, such as the UK and the Netherlands, take more of a middle-ground approach by turning to automatic enrollment.

A recurring question during the event was which of these two methods was a better approach to helping workers build sufficient savings to supplement their state pension. While some participants, such as Sherry, felt strongly that mandatory savings was essential, others, such as Benjamin Harris of the Urban Institute, argued that automatic enrollment achieved 90% of the benefit of a compulsory system and was far more politically feasible for the U.S.

Indeed, several proposals for automatic enrollment have emerged on both the state and federal level in recent years, ranging from President Obama’s Auto IRA proposal to Senator Harkin’s USA Retirement Accounts to innovative state initiatives in California and Illinois. Auto enrollment isn’t a cure-all by any means – for example, it retains the regressive structure of the tax code’s retirement provisions, and for some workers may actually result in lower savings due to the generally low defaults – but it still shows great promise for increasing overall participation and reducing racial and income-based participation disparities. The California proposal, Benjamin Harris noted, will set an important precedent for the feasibility of auto enrollment, and thus it is essential that the program be successful if this policy is to be adopted on a larger scale. Earlier this month, the California Treasury actually released a Request for Information seeking experts’ input on many of its programmatic and administrative features before the state conducts a feasibility study and prepares to begin enrolling workers by early 2016.

The Brookings event illustrated the wide range of policy choices involved in structuring a national retirement savings system – as well as challenges in these policies’ implementation. Whether through mandatory savings or automatic enrollment, the policies that work best are those that set workers up for success. Still, for lower-income workers, effective defaults would be significantly strengthened by effective incentives to save in the first place. One example is the match offered by the Financial Security Credit, which would support low- and moderate-income workers saving for both retirement and a range of other short- and long-term goals. But across systems, one lesson was clear: effective default policies matter.