The National Institute for Retirement Security released a report in August comparing pension systems in the United States to those in Australia, Canada and the Netherlands. NIRS studied those countries because development is similar to that of the United States, and they have established, high-quality retirement systems.
Overall, Americans bear more risk in their retirement plans than workers elsewhere, NIRS found. Through risk pooling or offsetting costs by employers or the government, “in none of these three countries does the average worker individually bear all of the risks related to saving and investing to produce a level of retirement plan income that, combined with social security, provides a basic standard of living.”
Compared to the United States’ “three-legged stool” retirement system of Social Security, employer-sponsored retirement plans, and voluntary savings, international retirement systems typically have a five-pillar system. In addition to the three pillars familiar to U.S. workers, some countries also have a non-contributory social security program funded by general revenue and a mandatory pension system administered through the workplace.
NIRS noted that income replacement rates are significantly higher in these three countries than other Organization for Economic Cooperation and Development (OECD) countries.
Social Security in the United States replaces about 42% of lifetime average earnings for the median earner, NIRS found. For low-income earners, the replacement rate is nearly 52%. In 2000, Social Security spending was about 4.4% of GDP, with a projected increase to 6.2% by 2050. About 40% of workers are covered by a workplace plan.
Australia has the most individualistic system of the three countries, according to NIRS. Of the five pillars, Australia uses a general revenue scheme, mandatory workplace retirement plans, voluntary employer-sponsored plans and private savings. It does not use payroll tax financing like Social Security.
Workers can tap their social security program, Age Pension (funded by general revenue, not payroll taxes), at age 65, although by 2023, that age will increase to 67. Benefits are offered on a means-tested, flat-rate basis, based on years of residency, and are phased out at higher income levels. NIRS noted that about half of retirees receive a full pension.
One of the drawbacks to the means-tested system is that it doesn’t include housing as an asset, and consequently, provides an incentive for Australians to overinvest in that area. It also encourages workers to retire early.
NIRS found that in 2000, Australia spent 3% of its GDP on social security expenditures and projects that by 2050, that will increase to 4.6%. “The low projected government spending in Australia reflects the role of mandatory employer-provided workplace retirement plans in conjunction with means and asset tests for social security,” according to the report.
Those mandatory plans are industrywide, which “reduce administrative costs through economies of scale,” according to NIRS. They also prevent benefit losses for workers who change jobs within their industry. They make up workers’ primary retirement savings and are taxed at reduced rates. The employer is the primary contributor while employee contributions are voluntary.
For the median earner, mandatory plans and social security replace about half of workers’ lifetime average earnings. They are especially useful for low-income workers, replacing over 73% of earnings for men and about 70% for women.
NIRS noted that Australia’s voluntary system is “relatively unimportant.” Workers can contribute up to AU$25,000 with a reduced tax rate, but NIRS found that only about 20% of participants do, and most of them are high-income earners.
Canada uses a general revenue scheme as well as a payroll taxing scheme. Unlike Australia, it does not have mandatory workplace plans, but it does use voluntary employer-provided plans and private savings.
Canadian workers have a 9.9% combined employer-employee social security tax rate with a ceiling of $51,100 in payroll taxable earnings each year. Workers are eligible for pension plan benefits at 60 and for Old Age Security (OAS) benefits at 65, although the age for those benefits will have increased to 67 by 2029.
Pension plan benefits are based on earnings, and OAS benefits are offered at a flat rate based on years of residency. Because Canada’s workplace plans are voluntary, the country has a much lower coverage rate: 32%. The employer and employee both contribute to the plans.
Among workers in employer-sponsored plans, about 80% are in defined benefit plans.
Workers don’t have to retire to start receiving benefits, although they would typically stop paying into the social security program. Since 2012, workers between 60 and 64 contribute to a special program called the Post-Retirement Benefit. Those who work until 70 may continue to contribute, in which case employers also have to contribute, but workers over 70 don’t have to continue paying into the social security program.
In Canada, OAS spending was 5.2% of its GDP in 2000, and is expected to increase to 10.9% in 2050, NIRS found.
OAS replaces about 48% of lifetime average earnings for the median earner. For low-income earners, the replacement rate is over 76%.
NIRS called OAS “more progressive” than Social Security in the United States. Benefits are higher for low-income workers, and roughly one-third of benefits come from general revenue. Contributions aren’t tax deductible, but NIRS said contributors can get a tax credit at the lowest rate.
NIRS found that one of the challenges Canada is facing in its retirement system is that Canadians are working fewer years but have an increasingly longer retirement period they need to cover as a result of delayed entry into the work force, increases in life expectancy and a drop in the retirement age from 65 to 60.
The Netherlands does not use a general revenue scheme. It offers a payroll tax social security program, a “quasi-mandatory” workplace retirement plan and private savings. Voluntary employer-provided plans are available, but as in Australia, NIRS called those savings “unimportant.”
The combined employer-employee payroll tax is 17.9% with an annual ceiling of $43,400. Benefits begin at 65 and one month, with an increase to 67 in 2023. Benefits are determined based on how long workers have lived in the Netherlands.
Spending as a percentage of GDP was similar in the Netherlands to Canada, at 5.2% in 2000 and a projected 10% in 2050.
NIRS said that workplace plans in the Netherlands are only mandatory under industrywide agreements. Industries that have mandatory plans have some of the same benefits as Australian plans: economies of scale, fewer benefit losses for job changers and a high coverage rate of 80%.
Employers who aren’t part of an industry with mandatory plans can still choose to offer a corporate pension plan. Including those voluntary employer-sponsored plans, coverage increases to 95%.
The Netherlands also offers collective defined contribution plans that combine features of DB and DC plans. Benefits in those plans are based on workers’ career average earnings and how long they’ve participated. Employees and employers contribute, and contributions are tax-deductible.
NIRS found that risk is shared in collective plans through risk pooling across workers and over time. Employers’ contribution rates are fixed. Higher rates can be negotiated to cover the cost of future benefits, a cost that is shared between employees and employers, but rates can’t be adjusted based on the plan’s funded status or returns achieved.
DB plans in the Netherlands are required to have a funding level of 105%. If they fall below that and can’t recover with increased employee contributions within three years, benefit levels are reduced. They’re also required to have a “buffer” in the event of a financial crisis, raising the minimum funded level on most plans to about 125%.
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