U.S. Can Learn from Retirement Abroad

Research from the National Institute on Retirement Security (NIRS) finds that while the U.S. faces a retirement crisis, other countries have implemented programs that provide a better level of economic security in retirement. For example, Australia, Canada and the Netherlands provide higher retirement income for more of their citizens through their social security and universal/quasi-universal employer retirement plans.

The paper, “Lessons for Private Sector Retirement Security from Australia, Canada, and the Netherlands,” was written by John A. Turner, director of the Pension Policy Center, and Nari Rhee, manager of research for NIRS.

“Americans are struggling to save for retirement. 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,” said Rhee.

Rhee added that the research done for the paper showed U.S. policymakers should look to successes in Canada, Australia and the Netherlands to “help get our retirement system back on track.”

“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,” said Rhee.

The paper also found that while the level of risk borne by employees varies across the three countries’ retirement income systems, risks are pooled among workers or offset by employers and government to a greater extent than in the United States. According to the paper, in none of these three countries does the average worker individually bear all of the risks related to saving and investing to produce a level of retirement plan income that, combined with social security, provides a basic standard of living.

Other findings included:

• All three countries provide relatively higher retirement income for low- and middle-wage workers through their social security and universal/quasi-universal employer plans combined than does the United States. In Australia and the Netherlands, universal or quasi-universal employer-sponsored programs provide a substantial supplement to social security income.
• Australia’s universal workplace retirement system, the Superannuation Guarantee, is a defined contribution system 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 Netherlands’ 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 more than 70% of lifetime average wage-indexed earnings for low-income workers and about 50% for median-income workers.

The paper concluded that the experiences of these countries in designing and adjusting their retirement systems can provide potential lessons for U.S. policymakers to improve private sector retirement security. Australia, after reviewing problems with its decentralized Superannuation Guarantee system, is carefully setting standards for default funds, fee disclosure and financial advice (see "The Bottom Line: Retirement Down Under"). The Netherlands has developed innovative hybrid workplace retirement plans, called Collective Defined Contribution Plans, which are DC plans from the perspective of employers, but are hybrid defined benefit (DB) plans from the perspective of employees. In Canada and the Netherlands, employee contributions to DB plans, not just DC plans, are tax deductible. The authors believe this may be a factor in the relative strength of DB plans in those countries.

More information about the paper can be found here.