Should the U.S. Mandate Private Pension Saving?

On Wednesday, July 9, 2008, The New America Foundation’s Next Social Contract Initiative hosted a panel discussion on Australia’s mandatory pension plan (aka “superannuation”).  Mavis Robertson, Former Chair of the Cbus superannuation fund, and Garry Weaven, Chair of Industry Funds Management and a member of the Superannuation Advisory Committee spoke on the pros and cons of superannuation. Jane White, President of Retirement Solutions, and Pamela Perun, Policy Director of the Initiative on Financial Security at the Aspen Institute, addressed whether modeling aspects of the Australian system could improve America’s current pensions system.  Michael Calabrese, Vice President of the New America Foundation, moderated the event. An MP3 audio recording can be downloaded below, while video is available at right.

Robertson opened the panel discussion by explaining the superannuation system. Superannuation took off in 1992 when the Australian government mandated that companies provide a compulsory 3% wage contribution to employees’ pensions. In 2002 that number rose to 9%. Employees can choose how to invest their funds and the accounts are portable. The four major options are industry funds, retail funds, public funds and self managed funds. Industry funds have been the most successful, averaging 11% return over the last 10 years, but still make up only 16% of the pension market. Retail funds managed by financial investors make up 33%, government employee funds 17%, and personal investors 23%.

Weaven spoke to the advantages and disadvantages of the system. He noted that Australia’s pension system is bolstered by a means tested social insurance system known as Aged Pension. Unlike American Social Security, Aged Pension eligibility is not based on prior work. He also argued that tax exemptions alone are not enough to encourage low and middle income earners to save for retirement so a mandatory system is necessary. According to Weaven, the complexity of choosing from thousands of investment options is a downside to the Australian system.

White compared the Australian system to America’s. The average Australian will retire will $553,000 in assets whereas the average American will have $110,000 dollars of assets, she said. Furthermore, because the mandated rate in Australian only recently increased to 9%, Australia is providing a generous $450,000 “catch up” subsidy over three years to workers over 50. She suggests that America emulate the Australian system by requiring companies without defined benefit plans to provide 401k plans with a 9% employer contribution.

Perun pointed out that America already has an extensive social insurance system and mandating an additional 9% pension would be excessive. Social Security already provides an average equivalent of $250,000 in retirement assets per person. Instead she proposed a system where workers could opt in to a “Super Simple” plan, which would mandate a small employer contribution but also require an individual contribution higher than current 401k plans. It would be portable and universal.

-Tyler Ibbotson-Sindelar, Research Intern for the Next Social Contract Initiative

Participants
Featured Speakers

• Mavis Robertson
  Former Chair
  Cbus

• Garry Weaven
  Chair, Industry Funds Management
  Member, Superannuation Advisory Committee (Australia)

• Jane White
  President
  Retirement Solutions, LLC

• Pamela Perun
  Policy Director, Initiative on Financial Security
  Aspen Institute

• Phillip Longman
  Senior Fellow and Research Director, Next Social Contract Initiative
  New America Foundation

• Michael Calabrese
  Vice President
  New America Foundation