Australian solution for the American pension crisis.

Australian solution for the American pension crisis.

In my senses, the Canadian system is closer to the American one. For example, 401 (k) is very similar to the Canadian RRSP, and the American Roth IRA – to the Canadian TSFA. But there are also serious differences – first of all with medicine.

You certainly know about the pension crisis in America – more than half of American families and singles face the threat of a decline in the standard of living with retirement; The social security system will completely deplete the accumulation by 2033, and will begin to cut benefits; about one third of American workers do not have pensions in their work place.

(the original is much juicier – Say g’day to Australia – but I find it difficult to translate into Russian a stereotypical Australian slang 🙂

Recently, it is quite often said about the Australian pension system taking the honorable second place (next to Holland) after Denmark, which leads the Melbourne Mercer Global Pension Index ranking compiled by the affiliate of the international holding company Marsh & McLennan Companies. So I decided to learn more about this in more detail, and see what America can learn from the experience of antipodes.

Pension by age: approximately corresponds to the American system of social insurance (Social Security). The maximum possible age pension is $ 28,000 / year (note – the amount is calculated on the basis of work experience and salary) for people aged 65 and older (starting from 2023, this age will rise to 67 years). Australians do not pay anything in this system – unlike Americans (FICA tax), and money in this system comes from the total income of the state.

Pensioners also receive other benefits from the state – discounts on prescription drugs, discounts on travel by public transport and so on.

The second component is the pension savings program known in Australia as “Super” (short for “Superannuation Guarantee” – pension guarantee). This program is the mainstay of the Australian pension system. Each employer is obliged to contribute 9.25% of the employee’s earnings in the age of 18 to 70 years (which also reduces the amount of taxes on earnings). By 2020, these contributions will be 12%. The money is invested at the discretion of the employee himself. Unlike the analogous American programs (401 (k), SEP, 403 (b), Roth IRA), the income for investments is taxed at 10%, and another 15% on capital gains ) if the investment has lain more than one year.

[from the comments: in the article error: tax on earnings of 15%, tax on capital gains is more than one year – 10%]

1. In Australia and the United States, the money in the program goes before taxes (reduces the income tax)

2. In Austria, income for investment and capital gain in the pension program are taxed, in the US – no.

3. In Australia, the poured out of the fund after reaching the retirement age are not taxed, in the US – they are taxed (with the exception of money on the Roth IRA program)

4. In Australia, you can start receiving money from 55-t years, in the US – usually from 59.5 (there are options)

5. In Australia it is almost impossible to take money from a pension account before retirement, in the US it is possible – although there are restrictions / staffs.

6. In Australia, the state old-age pension does not require deductions from income in the United States.

The third component is voluntary savings. An employee can put extra money on his pension plan, but only 20% of Australians do it, according to a study conducted by Julie Agnew,

author of the article “Australia Pension System: Advantages, Disadvantages and Reforms” (PDF) published under the auspices of the Center for Retirement Studies of Boston College.

According to David Knox, one of the authors of the report, in the 1980s the structure of the pension programs in Australia was similar to the American one, where slightly more than half of all workers had a pension plan. Realizing the threat to the aging population for the Australian social security system, the government and trade unions have developed a “Super” plan for which employers will initially have to pay 3% of wages to the pension fund. The main point was that unlike the system in the US, it obliged all employers, regardless of the size of the company, to make deductions. However, for those who work on their own (self-employed) plan such as Super does not exist.