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GUEST COLUMN: Are Australians better off than Americans on retirement policy?

Keating
Keating
Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.The Associated Press
Tuesday, September 05, 2017 12:01 am

Policy designed to ensure income for elderly residents must consider the anticipated dependency ratio. This ratio is simply the number of those over 65 years of age divided by working age adults.

For the U.S., unlike developing populations, no dramatic increase in life expectancies is expected. In addition, fertility rates and immigration in the U.S., unlike those in Japan and Italy, assist in sustaining a working age population. As such, the demographics of retirement policy in the U.S. are relatively favorable; the issue is the viability of existing programs to provide sufficient income for all retirees.

The Melbourne Mercer Global Pensions Index ranks countries on ensuring retirement income for future elderly residents. It attempts to measure the effectiveness of public and private programs, the level of retiree income for all residents, and the soundness and user-friendliness of retirement vehicles. In 2016, Denmark scored the highest at 80.5 and India near last at 43.4. The Global Pension Index scored Australia at 77.9 and the U.S. at 56.3. The question to ask here is “Do the facts support the idea that Australians are better off than Americans with respect to retirement policy?”

U.S. and Australian policies taken as a whole represent four basic types of retirement programs: an income safety net for all aged residents, a government mandated and managed program, a government mandated but privately managed program, and voluntary private plans encouraging savings through tax incentives.

Both the U.S. and Australia have safety-nets offering income to all retired residents below a certain income or wealth. About 4 percent of U.S. residents 65 or older do not qualify for Social Security. Therefore, Supplemental Security Income (SSI) provides stipends funded with general tax revenue to low-income people who are either aged, blind, or disabled.

Similarly, Australian residents at 65 (rising to 67 for those born after Jan. 1, 1957) are entitled to a full or partial Age Pension. Women, in particular, are most likely to rely fully or in part on the Age Pension. The Age Pension, paid every two weeks, is generous compared to international standards.

Unlike U.S. Social Security, Australia does not have a government managed public pension plan. Social Security contributions are linked to wage earnings with payments loosely linked to an individual's salary history. In the U.S., 96 percent of U.S. residents over 62 or disabled qualify for Old Age, Survivors, and Disabled Income (OASDI). The Old Age and Survivors part of OASDI is funded with a mandatory 12.4 percent annual payroll tax on wage income below $127,200. The so-called “lock box” refers to program assets to be used if and when outflows exceed contributions. Assets consist of exclusively of government debt in the form of U.S. Treasury securities.

In contrast to Social Security, Australia has a government-mandated program called “Superannuation.” This is not a government-managed program but rather consists of employer or employee contributions that are deposited in approved public and private investment funds. Employers must contribute the equivalent of 9.5 percent of an employee's ordinary time earnings as Superannuation Guarantee (SG) contributions.

Superannuation contributions are divided into two types — concessional (before-tax) and non-concessional (after-tax). Both are capped. Voluntary transfers of wage income up to the concessional cap are generally taxed at a lower than average income tax rate, and this lower rate applies as well to post-tax Super fund earnings. On retirement, the superannuation income stream and earnings on assets remaining in an individual's Super are exempted from taxation.

An Australian employee chooses how his or her super fund is invested from a list of approved investment options; otherwise, Super money is automatically placed in a default investment option. In general, there is no access to superannuation funds until retirement. These funds can be bequeathed tax-free to spouses and dependent children under 18 years of age. Adult children pay taxes on the employer contribution component of the balance.

An Australian employee can independently make tax-deductible super contributions if an employer fails to set up a pension plan supplementing the mandated Superannuation Guarantee (SG). Recall, however, that contributions must be placed in approved funds.

Although an Australians generally reduces personal income tax liability by topping up his or her Super, superannuation differs from U.S. 401k-type programs, i.e., Traditional IRAs, and Roth IRAs. These U.S. programs are created voluntarily by employers and/or employees, funded by contributions from wage income, capped at a certain level and invested however the employer or employee chooses.

Individual residents are advised to get personal guidance on navigating pension plans either in Australia or the U.S. Optimizing pension returns given personal circumstances is complicated. Global Pension Index rankings should be evaluated with caution because the Index is designed to address pension income, not national aspirations consistent with a country's history, culture, or political feasibility.

What conclusion can be drawn from comparing the U.S. and Australian retirement policy other than that there is no perfect policy for managing the income needs of elderly residents?

On the other hand, the Global Pension Index does have useful recommendations for improving pension policy. For example, the U.S. and Australia might be able to incentivize labor force retention for those approaching retirement. In addition, both countries could increase the age for private pension fund withdrawal and encourage withdrawal in the form of an income stream rather than lump sum. Furthermore, the U.S. might want to limit access to funds before retirement.

The U.S., in particular, is encouraged to raise the minimum pension for low-income retirees and increase mandatory contributions for median income workers. Without access to employer plans, median income workers are less likely to invest in a 401k or IRAs; however, other associations might assist in creating similar group plans. This would assist in increasing assets backing U.S. retirement income.

The Global Pension Index recommends raising the ratio of retirement income to pre-retirement wage income. However, this requires sacrificing present wages for future consumption. Unfortunately, a recommendation to increase minimum government payments is likely to reduce voluntary contributions. Nevertheless, it is a worthwhile determining if existing programs and incentives are adequate to approximate a pre-retirement standard of living.

Given Australia's culture and history, Superannuation is individualistic compared with Social Security providing income for spouses and dependents. Although U.S. residents would enjoy the possibility of bequeathing their government mandated pension, they are likely to object to restrictions on withdrawals and limited investment options on voluntary savings. Finally, Americans may be hesitant to forfeit a monthly check for one dependent on market returns.

When it comes to retirement plans, the most important issue concerns how individuals identify with the program. Aussies demonstrate a sense of ownership. Residents in the U.S. are more divided. Retirees, even those paying income taxes on their Social Security, appear to support the program. Gen Xers, on the other hand, often indicate that they do not expect to benefit from Social Security. As for U.S. politicians, they dread touching the third rail.

Maryann O. Keating, Ph.D., a resident of South Bend and an adjunct scholar of the Indiana Policy Review Foundation, is co-author of “Microeconomics for Public Managers,” Wiley/Blackwell. Dr. Keating is an authority on international cost-benefit analysis. 

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