The United States is facing a retirement security crisis. As the private sector has moved from defined benefit pensions to defined contribution 401(k)s, the retirement security of working families has been devastated. This switch also doesn’t account for the roughly half of workers who lack access to a retirement savings plan through their employer. Social Security is a great success story, but it replaces a smaller percentage of pre-retirement income now than it did in the past. What should the U.S. do in the face of this growing crisis? One place to look is in other countries that have found ways to guarantee a secure retirement for their working people.
The National Institute for Retirement Security’s report “Lessons for Private Sector Retirement Security from Australia, Canada, and the Netherlands” examines the different ways those three countries have ensured adequate retirement savings. Importantly, none of these three countries places the burden of saving and investing solely on the individual worker, as is so common throughout the United States. Each of these countries recognizes that the best way to achieve retirement security is through collectively pooled investments and shared risk.
Australia has a defined contribution retirement plan, but with important differences from the 401(k) plans so common in the U.S. For one, coverage in Australia’s plan is nearly universal. This is quite different from the U.S. where, at any given time, roughly half of private sector workers are not covered by a workplace retirement plan. Australian employers are also required to contribute 9% toward their employees’ retirement and that rate is rising to 12%. Again, this is different from the U.S. where employers may not contribute at all and, if they do, it is often a much lower percentage than 9%. It’s worth noting that both of these features- universal coverage and higher contribution rates- are typically features of public pension plans in the U.S. By following the Australian example and increasing both coverage and contributions, the United States could do a lot more to improve retirement preparedness for private sector employees.
The Netherlands has the most pension-focused retirement plan of these three countries. In recent years, the Dutch have moved away from a purely defined benefit model toward a hybrid defined benefit-defined contribution plan. Unlike in the U.S., however, where a hybrid plan typically involves cutting a pension benefit and then slapping on a defined contribution component, the Dutch have created an innovative “collective defined contribution plan”, which functions much more like a traditional pension for the employee. These collective defined contribution plans pool risk among a large group of employees, so no individual worker bears the investment risk. Also, as with defined benefit pensions in the U.S., investment fees are lower and the plan can maintain an optimal investment portfolio, unlike an individual defined contribution account.
Finally, Canada has a robust social security system that provides high income replacement rates for workers when they retire. Depending on the worker and their income level, the Canadian system could replace almost twice as much income as the U.S. Social Security program. Some in the U.S. have called for expanding Social Security in response to the retirement security crisis and it’s worth considering what lessons American policymakers could learn from Canada’s robust social security program.
After largely abandoning traditional pensions in the private sector, the United States has embraced a “do-it-yourself” style of retirement planning. This has failed most working families. While each country is different, there are important lessons to learn from countries that have actively sought ways to strengthen the retirement preparedness of their workers. With a retirement crisis looming, learning these lessons can’t come a moment too soon.