Q. You speak of a retirement crisis. What are the main features of a retirement crisis? To what extent do you think a crisis is due to local conditions as opposed to global factors?
A. Americans today are navigating a broken retirement system: nearly 40 per cent of Americans have no retirement plans at all and the average savings for someone between 40 and 50 years old is less than $20,000. If they’re going to have a middle-class lifestyle, they need at least US$300,000. The result is that one third of the people turning 65 will be in or near poverty when they retire, and we will have a greater number of poor elderly people in the US than we had in the Great Depression. We can secure a better standard of living for millions through a system that mandates all Americans to save for retirement while also giving them personal ownership of their savings and control to make decisions.
This situation is the result of a number of factors. Some local and some global. Big causes include years of stagnant incomes, financial setbacks from the GFC, US corporates abandoning pension plans, escalating costs of healthcare and higher education, low investment returns, flaws inherent in the US 401K system, and the lack of a requirement for US employers to provide any funding or even access to a retirement plan for their employees.
Q. In general term what does a good retirement system look like?
A. We probably need a model that mixes a government-run pay-as-you go element like US Social Security with an advance-funded program like Australia’s superannuation plans. Similar hybrid systems in the Netherlands, Australia, and Denmark have proven to be sustainable and effective. But nowhere has it worked to just rely on a pay as you go system like the US Social Security system alone. On top of that you need a plan that:
- is universal and portable across jobs;
- requires mandatory saving and, preferably, some employer contribution;
- allows accounts to be pooled for investment by top notch investment managers and to adopt long-term investment strategies that can earn higher returns, in both cases like US defined benefit pension plans; and
- pools longevity risk and pays out a minimum lifelong annuity to workers and their spouses.
Q. To what extent do cultural factors play a part? Are the US and the Australian systems different because of their different political and cultural traditions?
A. Culture plays a part, but US and Australians are probably pretty similar in terms of propensity to consume versus save.
Australia’s retirement system during 1980s resembled the US system today. Pension plans covered less than half of the workforce, and Australia had an ageing population. Many Australians were falling short in retirement, just as millions of American seniors are falling short today. In response, Australia implemented a retirement savings mandate in 1992, which has shown to be quite successful.
All workers today are covered by a retirement plan, from only 23 per cent of Australia’s low-income construction workers and government clerks owning retirement pensions more than two decades ago. The program currently has almost AU$3 trillion in savings, nearly as much as the country’s total gross domestic product.
Having said that, there are different histories, pre-existing institutions, tax laws and political realities that both countries must recognise and build around. This will lead to different systems, though there are certainly elements the US can borrow from Australia.
Q.What do you like about Australia’s retirement system?
A. Australia introduced a system in 1992, the national superannuation savings program, which has been a success. It’s a model that is government mandated and employer funded, but gives substantial individual control. Today, employers automatically contribute 9.5 per cent of each worker’s salary to a long-term retirement savings account. Although the mandate falls entirely on the employer, it has in no way damaged the Australian economy. To the contrary, it has been a major source of investment capital that has been largely reinvested back into the Australian economy, helping to build infrastructure and drive growth.
There are flaws, however. The biggest one is the lack of an option for retirees to pool longevity risk and automatically get cost effective and safe life-long income in retirement. In addition, the ability for beneficiaries to move their accounts from one manager to another on a moment’s notice hurts investment returns because it forces fund managers to adopt shorter term investment horizons and maintain excessive instant liquidity.
Q. Which parts of the Australian retirement system do you think would work for the US and why? Looking in the other direction are there lessons we can learn from the US?
A. Australia’s Superannuation Guarantee, a mandated savings system, represents a potential roadmap for the US. However, it’s not perfect and key issues persist, such as weak annuitisation, as mentioned above. In addition, a US system would need to build on Social Security, a highly popular program that provides a universal safety net that is particularly important to the poorest segment of society.
We propose a new model that takes the best from both worlds – the Guaranteed Retirement Account (GRA) system working together with Social Security. We designed GRAs so that they can offer everyone—from Uber drivers to CEOs—their own portable accounts. Under the plan, 85 million working Americans who currently do not have a retirement plan would receive one. While GRAs would be mandatory, they would be essentially cost-free for employees earning less than the US median salary. It’s a plan built on convenience, personal choice, private ownership, and effective investing. It would be people’s own money in their own accounts, outside the government’s purview. It would empower workers to save for retirement because Social Security alone is not enough. It solves the retirement problem with no new taxes, no increase in the federal deficit and no new government bureaucracy. It provides many of the benefits of a defined benefit plan for all Americans without creating the unfunded liability that has been so troubling in DB Plans.
Q. We hear about companies and even towns and state governments in the US facing bankruptcy because they can’t afford their defined benefit obligations – what is the general economic impact of this and what effect does it have on confidence? How can the US address the existing DB challenges it faces?
A. These underfunded DB plans can have major impacts on individual companies or localities. This is one reason they are not an answer to the US retirement problems. For many years politicians bestowed generous benefits without the taxes to adequately fund them. It is a classic example of short-term political expediency leading to long term problems. While this underfunding can have large impacts in certain instances, I don’t believe it has a significant general effect on the US economy. Each situation is unique, and each plan should be working on its own solutions. However, one thing that could help broadly across the board would be if state and local government pension plans—the vast majority of remaining US DB plans—had the same back-stop that insolvent corporate plans have through the Pension Benefit Guarantee Corp. The PBGC gives a federal guarantee to pension plan participants that if their plan goes under, they will at least get some minimum level of pension payments in retirement.
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Blackstone’s Executive Vice Chairman Tony James shared his insights with ASFA CEO Dr Martin Fahy during his recent Sydney visit.