These Countries Could Teach Us How to Fix Our Broken Retirement System

NEW YORK (MainStreet)—The American system of retirement savings is broken, and to fix it we should look to the examples set by Canada, Australia and the Netherlands. Those countries remove a significant portion of the investment burden from the individual worker and, as a result, provide higher retirement income for more of their citizens. These findings are contained in new research from the Pension Policy Center and the National Institute on Retirement Security.

"Americans are struggling to save for retirement," says Nari Rhee, NIRS manager of research and co-author of the report. "The typical family has only a few thousand dollars saved and the U.S. retirement savings deficit is somewhere between $6 and $14 trillion. Yet, other advanced countries are doing a far better job of enabling older populations to have economic security in retirement."

The research finds that in these three countries retirement investment and savings risks are shared among workers or offset by employers and governments to a greater extent than in America. Contrary to the U.S. system of retirement savings, the average worker doesn't individually bear all of the risk, and sufficient retirement income is generated that, when combined with social security, provides a basic standard of living.

"Our research suggests that U.S. policymakers are wise to look at successes in Canada, Australia and the Netherlands to help get our retirement system back on track," Rhee says. "While each country is unique, it's clear that universal coverage and risk sharing are essential success factors in the three countries we studied. In sharp contrast, the U.S. system for private sector employees has low rates of retirement plan coverage. Furthermore, the large-scale shift from pensions to 401(k) accounts has shifted almost all of the funding, investment, and longevity risks to employees. So it's not surprising that the U.S. lags behind other advanced nations, and that we have pronounced retirement insecurity for a majority of the U.S. workforce."

The research also finds that:

  • All three countries provide relatively higher retirement income for low- and middle-income workers through their social security and universal/quasi-universal employer plans combined than does the U.S.
  • Australia's universal workplace retirement system, the Superannuation Guarantee, is a defined contribution system much like U.S. 401(k) plans, in which workers bear investment risk individually. However, the success of the system is based largely on nearly universal coverage and high mandatory employer contributions, which are now a gross 9% of pay and will rise incrementally to a gross 12% of pay in 2019.
  • The Dutch pension-centered system, funded primarily by employers, is the centerpiece of a national retirement income system that provides some of the highest income replacement rates among wealthy nations. Employers are shifting market and longevity risks toward employees through the increased use of hybrid plans, but employees bear those risks as a group and intergenerationally, not as individuals.
  • While Canada has a voluntary, pension-centered employer-sponsored retirement benefit system with lower coverage than the Australian and Dutch systems, it has a highly progressive, two-part social security system that replaces over 70% of lifetime average wage-indexed earnings for low-income workers, and about 50% for median-income workers.

The report concludes that the "experiences of these countries in designing and adjusting their retirement systems provides potential lessons for U.S. policymakers for improving private sector retirement security."

--Written by Hal M. Bundrick for MainStreet

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