National retirement savings systems in Australia, Chile,New Zealand and the United Kingdom: lessons for the United States

Americans today face precarious retirement prospects that have only been made worse by the recession that began in 2007. The US social security system will only be solvent until 2019, after which it will spend more in benefits than it will receive in payroll and other taxes.

This paper examines the current and planned retirement savings plans of four countries with unique pension systems - Australia, Chile, New Zealand, and the United Kingdom -  and attempts to draw lessons for U.S. policymakers to use in their efforts to build a more sustainable pension system that can provide increasing retirement security for future generations.

Ideas hightlighted include:

• evidence suggests that while a mandatory system clearly works, automatic enrollment may achieve similar participation rates at a lower political cost. Two of the four countries (Australia and Chile) in this study have a mandatory savings structure, while New Zealand uses automatic enrollment, and the United Kingdom is starting an automatic enrollment system
  

• a decentralised system combined with some form of on-line component that could match employers with a financial-services provider interested in their business may be more efficient and faster to implement. If some segments of the market are underserved and cannot get access to a cost-effective retirement savings product, then some more formal and centralised system of providing accounts will have to be created. Somewhat similar problems resulted in Australia’s new clearinghouse
  

• companies that offer their employees 401(k)-type plans or traditional defined benefit pension plans should not be required to replace them with a new system. Instead, any additional system should apply only to companies that do not offer any type of retirement savings plan or pension and to the self-employed. Whilst 401(k)-type plans are notperfect, as the results of the current economic downturn show, nothing to date indicates that those workers would be better off in a new plan
  

• it is too early to determine how the new automatic enrollment systems in New Zealand and the United Kingdom will work. However, evidence from the United States shows that automatic enrollment can boost participation of eligible employees from roughly 75 percent to between 85 and 95 percent
  

• international experience shows that the best way to keep administrative costs low is to provide a simple investment platform with default investment funds and a high proportion of index-type funds
  

• a simple retirement system also increases the ability of workers to understand it and to be able to predict their retirement income. An extremely simple system such as that in New Zealand is probably the easiest for participants to understand, while the very complex U.K. system has left many workers both confused and nervous that their retirement income will be inadequate
  

Regardless of what system is chosen, it must operate in tandem with the existing employer-sponsored system, and not as an alternative to it.