We have a retirement crisis in the U.S. — of that there is little debate. Social Security is projected to go bankrupt by 2034. More than 50 percent of Americans are currently projected to be downwardly mobile after they stop working. About 30 percent will have to live on less than $20,000 a year. The question is whether in this toxic political environment our elected officials will do anything about the problem. However, by taking cues from the successfully remodeled Australian retirement system, I believe we can find common ground to create lasting solutions for future generations.
Australia’s retirement system is currently ranked third in the world behind Denmark’s and the Netherlands’ with a B+ grade according to the Melbourne Mercer Global Pension Index. (The U.S. gets a generous C.) It wasn’t always that way. In the 1980s, Australia had a system similar to what we have today in the U.S. But confronted with the reality that the government pension system would run dry within decades due to greater life expectancies and medical costs, employers, unions and government came together to hammer out a good old-fashioned compromise.
Fixing Australia’s government-sponsored retirement program, called the Age Pension, was an even taller task than repairing Social Security because Australian citizens don’t pay into it — the program is funded entirely by general public revenues. But fix it the government did, providing us with a potential template to follow.
First, we need to raise the retirement age for Social Security. In Australia the retirement age will increase from 67 to 70 by 2025. We should gradually increase full Social Security eligibility from 66 to 70.
Second, Social Security should be means-tested; that is, benefits are reduced for individuals with high income or assets. Only 56 percent of Australians receive a full Age Pension (with few complaints). We should also create a voluntary option for wealthy individuals to opt out of receiving Social Security distributions entirely.
Third, the ceiling on income subject to Social Security tax should be raised from $118,500 to $250,000. Social Security payroll tax was designed to hit 90 percent of all wages, but due to a rise in income inequality now captures around 82 percent. Going forward, the ceiling should be indexed to 90 percent of total wages.
The most important revamp of Australia’s retirement system was the creation of the Superannuation Guarantee, or Super. When introduced in 1992, Super required all companies to contribute 3 percent of an employee’s annual income into an employer-sponsored retirement account. In return, unions agreed to forgo previously demanded 3 percent wage increases. The employer contribution mandate has graduated to today’s rate of 9.5 percent, with further plans to increase it to 12 percent by 2025.
But Superannuation isn’t perfect. Only 20 percent of Australians pay into their own Super funds. In the U.S. we can improve upon that by providing greater incentives for individuals to contribute.
U.S. employers should be required to set up retirement programs for employees and make mandated minimum 3 percent contributions. In exchange, unions must agree to make concessions on current defined pension liabilities and all workers must submit to an auto-enrollment provision for employer-based retirement programs. Automatic employee contributions should start at 3 percent for young workers, automatically escalating with age up to 10 percent. Employees can contribute above the minimum, with further matching at the discretion of the employer. They can also opt out of personal contributions completely, but data shows only 6 percent of those with access to employer-based retirement programs choose not to enroll. As part of broad tax reform in the U.S., the tax framework for 401(k)s and IRAs should also be simplified and reduced to provide more incentive to save. Employer and salary-sacrificed contributions should be taxed progressively starting at 10 percent, escalating to a maximum of 20 percent for those making more than $400,000 a year. We should create a fully refundable earned-income tax credit for those making less than $40,000 a year. Retirement funds should then pay a flat tax rate of 10 percent on dividend income and long-term capital gains, with all withdrawals occurring tax-free.
The U.S. should also follow Australia’s plan to prohibit loans and early withdrawals from retirement accounts (barring extremely extenuating circumstances) and raise eligibility for distributions from employer-sponsored retirement accounts from 55 to 60 by 2025. Superannuation money can also be directed to private funds run by trustees, which creates a competitive marketplace that puts downward pressure on fees. In the U.S. fees for 401(k) management currently average around 1 percent.
The U.S. can solve its deepening retirement crisis by borrowing ideas from Australia’s successful Superannuation Guarantee program, while also creating a system that more fully embodies the spirit of American self-reliance. It’s time for all stakeholders to come to the table and make sacrifices to safeguard the future of our children and grandchildren.
Anthony Scaramucci is founder and managing partner of SkyBridge Capital and host of Wall Street Week.
