You Manage It! 1: Global Australia’s ‘Super’ Retirement Program Is a Source of National Pride
Australia currently has one of the most highly regarded retirement systems in the world. It is based on compulsory employee contributions that are put into a retirement fund. The retirement system is called Superannuation and it functions similarly to a 401(k) retirement plan in the United States. Currently employers in Australia are required to send 9 percent of an employee’s salary into the Superannuation program, which provides a menu of different investment funds that allows employees to make choices regarding how to allocate their retirement funds into investments that differ according to risk. Employees’ contributions and investment earnings are taxed at 15 percent, substantially below the ordinary income tax rate. Around 20 percent of employees put additional earnings into the retirement fund and some employers match the contributions that employees put in the fund. More than 90 percent of employed Australians contribute to Superannuation, compared to 40 percent of American employees who participate in their employer’s retirement plan.
The Superannuation retirement program augments a national pension system in Australia that is funded by taxes and is similar to the Social Security retirement program in the United States. At present, the Superannuation program has grown to an amount equal to the equivalent of $1.5 trillion, which represents over half the amount that Americans have put into their 401(k) accounts, despite the fact that the United States has a population that is 14 times larger than that of Australia. Consequently, experts estimate that an Australian employee who contributes to the Superannuation program over a 30-year period can expect to have a retirement income equivalent to 70 percent of his or her preretirement income. This is the percentage of retirement income that financial experts recommend.
The Superannuation program began in 1992 and initially it required a compulsory contribution of 3 percent of an employee’s salary. Over the years, Australians have voted for increases in the size of the mandatory contributions to Superannuation, so that the employee contribution now currently stands at 9 percent of salary. However, in a recent election Australians approved a gradual year-by-year increase in the contribution amount, which will end up at 12 percent by 2019 because people in future generations will be likely to require a greater amount of retirement funds to cover longer life expectancies. By comparison, U.S. employees save an average of about 6 percent of their salaries into a 401(k) retirement fund, and consequently many Americans are concerned that they will not have enough retirement income saved when they decide to retire. Due to the success of the Superannuation program, when Australians think about their retirement they have a good reason to smile.
Critical Thinking Questions
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12-9. What can retirement benefits specialists in the United States learn from the successful experience of the Australian Superannuation retirement program? Do you think that American citizens would support a law that requires that 9 percent of employee salaries must be contributed into a 401(k) retirement fund? Explain your reasoning.
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12-10. Although Australia’s Superannuation program has been successful, experts have pointed out a flaw in the design—it does not provide for an annuity option for most of the retirees. An annuity provides a consistent retirement income that continues for the life of a retiree and it is created when individuals voluntarily roll over their retirement fund accumulations into the annuity. Why do you think experts consider that the lack of an annuity option in the Superannuation program could be a problem for Australian retirees?
Team Exercise
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12-11. Although the Superannuation retirement program in Australia uses a defined contribution retirement plan design, retirement benefits in many countries base their retirement system on a defined benefit design. For example, the retirement system in France consists of a pension plan (i.e., defined benefit) that has the following features: (a) retiree must reach age 65 to receive full retirement benefits and have worked for a total of 40 years; (b) the retirement salary is based on providing 70 percent of the average salary over the 20 best salary years during an individual’s employment history; (c) the system is funded on taxes taken from the incomes of the working population in France and these funds are transferred directly to the population of retirees. With a group of four or five students compare the advantages and disadvantages of the French retirement system based on a defined benefit plan, and the Australian retirement system which is explained in the case presentation. Which system does your team prefer? Be prepared to share your team findings with the class.
Experiential Exercise: Individual
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12-12. The purpose of this exercise is to ask you to reflect on the philosophy of employee benefits in the United States, where the employer is the primary source of benefits coverage as was explained at the beginning of this chapter. While Australians are required to contribute 9 percent of their income into the Superannuation Fund, in the United States the equivalent 401(k) retirement plans are provided by an employer on a voluntary basis (not required by law), and employees have the right to opt out and not contribute any of their income to the 401(k) retirement plan if that is their preference. Do you agree with this voluntary approach to benefits in the U.S.? Why do you think most of the other countries in the world require their employees to contribute to retirement benefits?