Australia’s retirement system has a much higher asset growth rate than other industrial nations. It also spends less on old-age pensions and has high individual savings rates.
According to a report by Julie Agnew for the Center for Retirement Research at Boston College, the U.S. could learn a few lessons from Australia’s system, which combines mandated individual savings and a means-tested government pension.
In her research, Agnew found that plan participants often accept their plan’s default investment option, and while both the U.S. and Australia have introduced guidelines for default investment allocations, Australia’s greater emphasis on defaults should ensure that their guidelines have a more far-reaching impact.
Australia also is actively promoting the availability of advice, using standardized information on risks and fees and an expansion of “simple advice,” and has imposed a fiduciary mandate on those who advise plan participants.
Australia also requires its employers to make contributions to participant retirement accounts, so it has achieved nearly full pension coverage of all of its workers.
The U.S. doesn’t come close to covering all of its workers. Fewer than half of U.S. workers have any coverage in their current job. Even workers with coverage have only modest account balances due to low contribution rates, Agnew pointed out.
Australia also restricts access to retirement savings before retirement while people in the U.S. can cash out their 401(k) plan when they leave a job, take out loans from their accounts and make hardship withdrawals.
Australia’s system isn’t perfect. In her report she details key aspects of Australia’s system that remain a concern such as the existence of incentives to game the system, weak annuity markets and low levels of financial literacy.
The country recently enacted reforms that should strengthen the individual account component of its retirement income system. These include improvements in plan defaults and the presentation of information and controls on conflicts of interest in the provision of financial advice, she said in the report’s conclusion.