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Secure Retirements May Depend on Learning From Australian Pension System

by Eric

I have never been to Australia, but I have been thinking about Australia lately. No, not about Foster's lager and fuzzy koala bears - about superannuation. The Australian government mandated pension construct may offer a glimpse into the future for the United States, and smart firms should be thinking about that future today.

Americans have spent the last two decades of relative prosperity undersaving and overconsuming. There are indications that the silver lining around the recent meltdown is an increase in Americans' propensity to save. However, this phenomenon is both too recent and too insufficient to provide most people with comfortable retirement years. Even with the recent increase, people are not saving the 10% that planners say is needed to fund a continuing standard of living for a lengthy retirement.

Safety nets like Social Security, Medicare, Medicaid, etc. will cushion the blow for some short-term. However, grave long-term issues need to be addressed soon. Thus far, few are talking about creating a system that protects people from their own and others' poor planning.

The Australian superannuation construct is essentially a mandatory defined contribution plan, funded by employers. Current contributions amount to nine percent of salaries. Australians now have over $1 trillion set aside after more than a decade of compulsory contributions.

Connecting these dots:

1. Americans do not save enough to fund their own retirements
2. A demographic tsunami of these undersavers are heading into middle age, with an only-slightly-smaller Generation X right behind them
3. The traditional safety nets that ensure minimum thresholds of income are fraying
4. The current government administration has shown a willingness to intervene in markets (e.g. bailouts, executive compensation limits, etc.)
5. There appears to be significant public and political sentiment for creating better universal constructs to deal with universal issues (e.g. health care)
6. The only options for a significant change in policy are millions of elderly poor, massive government deficit spending, or equally massive redistributions of wealth. It follows that we will end up with a system that is similar to superannuation

This should matter to investment managers for multiple reasons:

• If we are headed towards adopting a menu of government sponsored providers and products, then planning and lobbying should start soon


• The "save more" message resonates in this environment; companies who focus on the "save more" message now will be viewed as white knight fiduciaries in the future


• In the interim, there will be more talk about products and services that protect investors against their own poor decisions, or that at least require them to make fewer good decisions while still prospering. For example, imagine a 22-year-old checking a box at her first job that allowed for enrollment, increase, rebalancing, rollover, and ultimate distribution of retirement funds

Over the years, the world has learned much from American innovation and ingenuity, especially in the world of business and finance. In the spirit of free trade and progress, it is time we imported a great idea too.