Three nations offer lessons for providing high quality retirement plans with income adequacy, financial sustainability, and risk sharing.
Lessons for Private Sector Retirement Security from Australia, Canada, and the Netherlands authored by John A. Turner, PhD, director of the Pension Policy Center and Nari Rhee, PhD, manager of research for the National Institute on Retirement Security.
- Read the Issue Brief here.
- Download the PowerPoint here.
- Read the Press Release here.
- Listen to a review of the research here.
The goal of the research is to assess the level of security and risk provided by each country’s retirement system through the layers of income replacement provided by government, employer, and individual programs. In addition, this paper highlights key issues and lessons for consideration by U.S. policymakers and stakeholders.
The paper finds that while the level of risk borne by employees varies across the three countries’ retirement income systems, risks are pooled among workers or offset by employers and government to a greater extent than in the U.S. In none of these three countries does the average worker individually bear all of the risks related to saving and investing to produce a level of retirement plan income that, combined with social security, provides a basic standard of living. The research also finds that:
- All three countries provide relatively higher retirement income for low- and middle-wage workers through their social security and universal/quasi-universal employer plans combined than does the U.S.
- In Australia and the Netherlands, universal or quasi-universal employer-sponsored programs provide a substantial supplement to social security income.
- Australia’s universal workplace retirement system, the Superannuation Guarantee, is a DC system in which workers bear investment risk individually. However, the success of the system is based largely on nearly universal coverage and high mandatory employer contributions, which are now a gross 9 percent of pay (7.65 percent net after taxes) and will rise incrementally to a gross 12 percent of pay in 2019.
- The Netherlands’ pension-centered system, funded primarily by employers, is the centerpiece of a national retirement income system that provides some of the highest income replacement rates among wealthy nations. Employers are shifting market and longevity risks toward employees through the increased use of hybrid plans, but employees bear those risks as a group and intergenerationally, not as individuals.
- While Canada has a voluntary, pension-centered employer-sponsored retirement benefit system with lower coverage than the Australian and Dutch systems, it has a highly progressive, two-part social security system that replaces over 70 percent of lifetime average wage-indexed earnings for low-income workers and about 50 percent for median-income workers.
The experiences of these countries in designing and adjusting their retirement systems provides potential lessons for U.S. policymakers for improving private sector retirement security:
- Australia, after reviewing problems with its decentralized Superannuation Guarantee system, is carefully setting standards for default funds, fee disclosure, and financial advice.
- The Netherlands has developed innovative hybrid workplace retirement plans, called Collective Defined Contribution Plans, which are DC plans from the perspective of employers, but are hybrid DB plans from the perspective of employees.
- In Canada and the Netherlands, employee contributions to DB plans, not just DC plans, are tax deductible. This may be a factor in the relative strength of DB plans in those countries.
Download the research here.