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Why Australia Offers a More Secure Retirement for Private Sector Workers than the US

Traditional pension plans used to be how workers were able to rely upon and expect an old age that was secure. Within these defined benefit plans, the Rule of 90 was commonplace as a mechanism whereby one could precisely calculate how much they were to be paid in exchange for decades of service to an employer. Based upon a specific formula, the Rule of 90 would accordingly pay out a certain percentage of the five highest years of earning for that retiree.

Public and private sector unions similarly had DBPs for their workers. Indeed, to this very day, the Rule of 90 does continue for a fraction of whom it did over thirty years ago. Those whom still have access to it include several civil service unions throughout the country at the municipal and state levels, more often for employees engaged in public safety.

The move away from DBPs to defined contribution plans such as 401 (k)s allowed for the employer to shift retirement funding responsibilities from themselves to the employee, a transition of which took place thirty years ago. That is only part of the picture, however. The worker now has to rely upon the stockmarket for providing him with an income during his old age. U.S. equity markets did nothing as far as capital appreciation in real terms from 1929 until 1954 and then all over again from 1966 until 1990. These timeframes represent periods of a quarter century.

Decade and a half cycles from 1929 until 1954 and 1966 until 1982 were much worse. These were periods known as secular bear markets. Stocks lost half of their value in these periods. By contrast but also by way of example, the secular bull market that commenced in August of 1982 reached its pinnacle in March of 2000. Almost ten years later, we find ourselves at levels not seen since 1997 so, in effect, twelve years of gains have been lost. Horrifically, retirees then have to take withdrawals from these accounts which amounts to drawdowns on principal as opposed to profits that have largely evaporated.  

Whereas pensions required large contributions from the employer in conjunction with employee payroll deductions, U.S. federal law does not require employers to put up any type of matching amount which would augment the employee's contribution. The employer's contribution is entirely discretionary and voluntary on behalf of the company based upon how the firm arbitrarily and capriciously feels about such matters.

Australian law offers a much different story. Statutory mandates stipulate a forced contribution rate of 9% of salary from all employers along with much higher limits for employee contributions compared to current American limits on employee contributions.  American companies usually offer 3% as their contribution rate and during bad times, this rate often disappears for a year or longer under the argument that it is all done in the interests of avoiding layoffs and maintaining corporate health.

Other inequities persist as well. The typical retired U.S. federal civil servant, has a median benefit of $17,000 as of 2005 which dwarfs the $7,692 in median benefits received by the typical private sector pensioner. Unions in Western Europe have been well-known for negotiating packages where the worker retires at the age of 50 with a full pension along with health insurance and other benefits. In 2005, NYC-based unions were bargaining for similar deals although the end result may have ultimately been diluted from the initially requested amount. 

A secondary question arises from this scenario. When a taxpayer who does not have a pension is required to subsidize very nice public-sector pensions, how is it that the Fortune 500 employers managed to avoid the congruent responsibility of DBPs for their own workers?

Policies, laws, and incentives are all very favorable to American big business. The Fortune 500 in the U.S.A. has little incentive and arguably interest to do much for its retirees at all but they can still write off and depreciate seemingly countless expenses and deductions. Matching and exceeding the Australian model is an imperative and a financial necessity in light of the typical 65 year old having about $110,000 in combined 401 (k) and rollover IRA accounts. Otherwise, the net result would be for those retirees to never retire and literally keep working until they can no longer live.

Disclosure: Author is long US bond and fixed income securities at the time of writing.