A National Retirement Policy
The U.S. has an atrocious national retirement policy. Social Security is expensive and redistributes income. It also isn’t properly funded. The private savings system works for only a few people. There are examples of good national retirement policies. This article describes Australia’s, but there also are good models in Chile and Denmark. It’s too late for most people who are approaching retirement age. But a revised national policy would over time improve greatly individual security and I think national wealth.
What makes Oz so different? For Australians, not saving is simply not an option. The 1992 law required employers to divert 3 percent of most workers’ salaries into retirement accounts, and the level has been raised over time as the public has gotten used to the idea. Nine percent of virtually every paycheck now goes into these Super funds, and it will be 12 percent by 2020. One in five employees saves even more with voluntary contributions known as “salary sacrifice.” Some companies match workers’ contributions. Both contributions and investment earnings on them are subject to a 15 percent tax. That’s a lower rate than almost all workers pay in income tax. Withdrawals by people 60 and older are tax-free.
“It’s carrot and stick, basically,” says Jeremy Duffield, chairman of the Australian Centre for Financial Studies. “The carrot was you’d get some tax concessions for contributing to a Super. The stick was you had to do it.” Duffield was in the middle of a 30-year career at Vanguard when he returned to his native Australia in 1996, as the superannuation industry was taking root, to found Vanguard Investments Australia. Today about half of workers choose to have a money manager like Vanguard or Fidelity Investments manage their Super funds, but more participants are doing it themselves. The number of people in self-managed Super funds has grown 74 percent since 2004, and their assets have surged 244 percent, to A$439 billion ($422 billion).
