- The Australian superannuation system imposes employer-funded superannuation contributions.
- In contrast, U.S. retirement plans rely on employee contributions to accounts like 401(k)s.
- If the United States adopted the Australian pension model, it could have an impact on wage levels.
For many people around the world, retirement can be a mixed bag.
Australian retirees rate their happiness in retirement at 70 out of 100, according to a February survey of 1,000 Australians aged over 60 by independent researcher YouGov and investment management company Challenger Limited. Money was ranked after good physical health as the key to a happy retirement.
Meanwhile, the U.S. retirement system has become anxiety-provoking for many, as older adults struggle to make ends meet. More than half of Americans over 65 earn less than $30,000 a year, according to a report by Senator Bernie Sanders published in March and based on National Retirement Risk Index data.
In the United States, retirement accounts are a company benefit that employees can choose to contribute a portion of their salary to throughout their career. Australia, however, requires employers to make regular contributions to a superannuation fund for each employee – a system called superannuation.
Catherine Reilly, researcher at the financial research firm The TIAA Institute and a non-resident researcher from the Center for Retirement Initiatives at Georgetown University said Australia’s system ensures all adults have a retirement fund.
“Everyone is subject to a plan,” she said. “Whereas in the United States, you only get a plan if you work for an employer that offers it.”
Seventy-one percent of non-retired Americans say they are at least moderately concerned about being able to finance their retirement, according to a Gallup poll of 1,013 American adults in April 2023.
Reilly said there are structural differences in how America and Australia manage older people’s savings. And while It might be difficult to implement Australia’s system halfway around the world, but the United States could come close, she said.
Australia’s superannuation system puts responsibility for saving on employers, not employees
The current retirement infrastructure in the United States includes two broad categories: defined contribution plans and Social Security.
Defined contribution plans, which include 401(k) and IRA accounts, allow employees to save and invest the money they have earned throughout their careers, usually by depositing a percentage of their salary regular directly to the accounts.
Companies can also contribute to an employee’s 401(k), but there is no federal requirement to do so. The retirement accounts an employee has access to and the benefits they receive after they stop working all depend on the retirement program each company offers.
In a 2024 letter to investors, BlackRock CEO Larry Fink said the U.S. retirement system puts undue pressure on employees to decide how much to save and invest. With the cost of living rising in many U.S. cities, it can be difficult for Americans to predict how much money they will need, a problem Fink called an “impossible math problem.”
Social Security also comes into play when Americans retire, providing monthly government benefits based on an individual’s reported income. The federal insurance program is funded by taxes and provides income to retirees and disabled workers. Many retirees collect Social Security checks in addition to living off their 401(k) savings.
Traditional fixed-income pensions are no longer a common corporate benefit in the United States, but are still offered by some government and civil service jobs.
In Australia, however, companies are legally required to contribute 11% of an employee’s monthly salary into their superannuation account. This money can be invested in stocks, real estate, cash or bonds – the employee has the choice. Employees can also contribute, but much of the responsibility for saving falls on their employer.
The amount of employer contributions should increase to 12% next year.
When they reach retirement age, which is between 55 and 60 depending on the year of birth, Australians can access the fund with their savings and investment income.
“It levels the playing field because everyone is part of a plan,” Reilly said, adding that Australians have more choice in where and how their retirement money is saved.
As Reilly explains, superannuation also allows retirees to access their money in one place.
This differs from the U.S. system, where retirees’ money is often held between a 401(k), other accounts and outside investments. If a U.S. employee works at several different companies over the course of their career, Reilly said that can also complicate their retirement funds.
Additionally, Australian government age pensions are not the same as Social Security. Retirees must meet sufficiently low asset criteria to access the old age pension. Reilly said the more limited pension could be a drawback of the Australian system, as many people’s retirement depends almost entirely on their pension funds.
If the United States adopts pensions, it could impact employee wages
Although the Australian government sets the terms of superannuation, it is managed by the private sector. Employers manage their employees’ retirement funds without much political control.
If America adopted pensions, Reilly expects the system would work the same way: The federal government could determine the percentage of an employee’s income that employers must contribute, but businesses could then arrange themselves the retirement funds.
She discussed joint employer plans, a retirement fund strategy already being piloted in the United States, allowing multiple companies to contribute to a single retirement fund for an employee if that person chooses to work at different companies throughout of her career. Some states, like California and Colorado, also require employees to be automatically enrolled in some sort of retirement plan.
“In the United States, the infrastructure for the private sector to manage these funds already exists,” Reilly said. “And I think that would be a sensible way to do things.”
Reilly nevertheless warned that the application of the Australian pension system in the United States could have a negative impact on employee salaries. Because, for businesses, it would be “very unpopular”, she believes.
When a company hires a new person, they said they take into account the total cost of employing that person. This includes salary, bonuses and benefits. If U.S. employers become legally required to contribute to retirement funds, Reilly said companies could reduce their employees’ salaries to offset this new cost.
Still, a system like superannuation could help ensure a retirement fund for the 56 million private-sector employees who don’t receive retirement benefits through their employer, The Pew Charitable Trust reported in January.
Are you an American or Australian considering retirement? Are you willing to share details about how much you have saved and your savings strategy? Contact this journalist at allisonkelly@insider.com.
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