Australia has the right idea about retirement [Financial Perspectives]

With all the focus on Obamacare lately, few people are talking about the looming retirement crisis that the U.S.  is facing. Social Security is scheduled to run out of money by 2033, Medicare is in horrible financial shape, and many of those approaching retirement are not saving nearly enough.

Our politicians have failed to address some of the structural issues in our entitlement programs and the longer we wait to address these issues, the worse we are making things for our children and grandchildren.

We owe it to ourselves to look at what other countries are doing to address these very important issues. Australia is one of those countries. They have a retirement system made up of two components.  The first is called the Age Pension. This component is similar to our Social Security and it is funded through Australia’s general fund (no contributions by citizens). The pension may pay up to $28,000 per year at age 65.  The catch is that the Age Pension is means-tested… meaning that those with higher incomes receive reduced payments.  The program is moving the minimum age to receive benefits to age 67.

The second component of the program is called the Super.  In this program, all employers are required to contribute 9.5 percent of an employee’s wages into a retirement fund.  Employee contributions are not permitted.  To cover the cost of contributing to such a program, employees generally receive lower wages or they receive smaller raises.  Unlike with 401k plans here, employees are not permitted to take loans or arbitrary distributions from their accounts.  This helps to ensure the stability of the program.  Another benefit of the program is that the investment earnings are taxed each year and ultimately the employees are not taxed on distributions from the Super.

Between these two funds, most Australians will be able to meet the majority of their retirement expenses and not live in fear that they will run out of money.

Australia had a system very similar to our Social Security system but they decided in the 1980s that a change was necessary to avoid the type of crisis we are now facing.  The program was put into place through a combined effort of government, union and corporate leaders.  It is interesting to see how such a program can be created when our leaders actually do their jobs and push politics aside.

The Australian system may not be a good fit for us, but we need to re-start the conversation about this issue and do it soon.

Good luck with your planning!

The views expressed are not necessarily those of Cambridge and should not be construed as an offer to buy or sell any security.

Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC 8725 Frankford Avenue Philadelphia, PA 19136 215-332-4968

Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.

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