Americans contemplating retirement can almost despair seeing how Social Security’s fuse may be two years shorter than official estimates and is in need of shoring up at precisely the time when political paralysis in our nation’s capital has grown ever more entrenched.
And yet, stepping back and seeing beyond the maelstrom of partisan clashes in Washington, one can look at the experience of retirement income systems overseas for possible solutions, or at least benchmarks, that may help us solve our own seemingly intractable problems.
To that end, AdvisorOne spoke with Wharton professor and Pension Research Council executive director Olivia Mitchell, one of the foremost authorities on U.S. and international private and social insurance.
AdvisorOne: Are there other retirement systems that policymakers should be more familiar with?
Olivia Mitchell: The Australian one is of particular interest to me because it is mandatory. When it was put into place, they said it would be a good idea to establish a 12% contribution rate, but they put it at 9%. But the 12% rate will be phased in fully by 2020.
In the U.S., 3% or 4% is a more typical workplace rate. We should revisit the question of how much we should be contributing. The Chileans have had a mandatory contribution rate of 10%. I tell my students and adult daughters they should be contributing 20% of their income for three reasons: Longevity is increasing, returns are not as strong anymore, and we’re going to need a lot of money in retirement.
This notion that you can get by on 3% or 4% is very misleading. So the lesson from these countries is, yes, we should be contributing more.
AdvisorOne: With the Social Security insolvency looming, is there a reason not to pursue high, mandatory contributions?
Olivia Mitchell: In the U.S., there are social safety net programs like SSI for those who are destitute in old age, or Medicaid for those who run out of money and need to go to a nursing home.
The question does come up: How much should we be encouraging or mandating low-wage workers to save when there are so many benefits they [stand to lose] in old age?
Many of these folks don’t have the ability to save. And if they were forced to do so, they wouldn’t be able to pay their bills.
In the U.S., if you do save, then you may be less likely to get the Medicaid benefits; you’ll be asked to pay a higher Medicare premium.
AdvisorOne: Does Australia’s experience with means testing hold lessons for the U.S.?
Olivia Mitchell: Australia’s Age Pension scheme [its Social Security equivalent—eds.] is a means-tested benefit program such that if you have too much income or too much assets, you don’t get this benefit.
It becomes an issue when you get to be retirement age and you decide whether you want to take Superannuation [Australia’s workplace-based retirement account] benefits as a lump sum or payout scheme.