What Does It Look Like?
Australias social security retirement income system consists of a
means-tested benefit, known as the age pension, and mandatory
occupational savings schemes or pensions, known as the
superannuation guarantee. Unlike most other high-income countries,
Australia has never had an earnings-related social insurance
pension system.
The Age Pension
The age pension, financed by general revenues, pays a flat amount
to anyone who qualifies. Income and assets (excluding the home) are
taken into consideration in determining eligibility. The
eligibility age is 65 for men and is rising gradually from 60 to 65
for women. Previous workforce participation is not required. Many
older persons spend down their assets to qualify.
The Superannuation Guarantee
Although Australia has long had a system of employer-provided
occupational pensions, those pensions covered less than half the
workforce as of the early 1980s. Beneficiaries tended to be higher
earners, male, and/or public-sector workers.
Reform in 1986 led to expanded private pension coverage.
Nevertheless, a number of problems remained, most particularly
non-compliance by small employers. To correct these, the government
in 1992 mandated employer-provided pensionsthe superannuation
guaranteewhich since 2002 has required employers to contribute an
amount equal to 9 percent of workers earnings to superannuation
individual accounts. Employees are not required to contribute but
can make voluntary contributions for themselves and their spouses.
To help low-income workers save, the government will match every
A$1 of personal superannuation contribution with a co-contribution
of A$1.50, up to a maximum government co-contribution of A$1,500
per annum for workers with income of less than A$28,000 a year.1
The superannuation plan may be a defined benefit or defined
contribution planmost are defined contribution.
The superannuation guarantee covers most full- and part-time wage
and salary workers aged 18 to 70 with earnings of A$450 or more in
a calendar month. More than 90 percent of wage and salary workers
were covered by the superannuation guarantee in 2002.2
Australian workers typically have not been able to choose an
investment fund; however, as of July 1, 2005, most employees who
participate in superannuation will have the option of selecting the
fund to which their employers compulsory contributions are
made.
The superannuation guarantee is payable at age 55 to beneficiaries
who are totally retired. This age will rise gradually to 60 between
2015 and 2025. Benefits may be taken in the form of an annuity or
lump sum. Survivors benefits are not mandated. Lump-sum benefits
are fully inheritable, and the law provides that assets may be
divided by agreement or court order upon divorce.
How Does It Pay?
The age pension is the major source of income for Australias
retirees. It is received by about three-fourths of retirees. As of
March 2002, two-thirds of age pensioners received the maximum rate
of pension and the rest received a partial rate.3 The age pension
is adjusted twice a year to account for changes in the cost of
living.
The superannuation guarantee was introduced in part to reduce
government expenditures for old-age pensions. It operates somewhat
like a clawback, whereby the benefits from one program are offset
by the benefits of another. As workers superannuation guarantee
accounts grew, workers would have greater assets and thus no longer
qualify for some of or even any of the age pension. The guarantee
may not, however, have as great an impact as might have been hoped
for. Despite tax incentives to encourage annuities, most workers
have opted for the lump sum. The lump-sum provision may serve as an
incentive for workers to retire early and withdraw their
accumulated funds, spend them, and subsequently qualify for the age
pension. Observers have underscored the conflict between the
superannuation system, which is designed to encourage saving for
retirement, and the means-tested age pension, which discourages
it.4
Womens discontinuous work histories and generally lower wages than
mens mean that on average women will accumulate less in their
superannuation accounts than men will. Rising labor force
participation rates, however, should improve those balances. Even
so, only under the most favorable assumptions is it likely that the
superannuation guarantee will provide adequate retirement income to
either men or women.5 The Australian Taxation Office stresses that
the superannuation guarantee is a supplement to, not a replacement
for, the age pension.6
Lessons for the United States?
Both the United States and Australia have retirement income systems
that provide benefits to the aged, although Australias
means-tested age pension is very different from the
earnings-related Social Security benefit in the United States. In
the United States, low-income individuals may be eligible for
means-tested Supplemental Security Income (SSI) benefits, although
this program benefits a small fraction of the aged. Asset testing
of Social Security benefits has surfaced on occasion in proposals
to restore long-term solvency to the system, although that idea has
generated little support.
Both countries are concerned about the rising costs of an aged
population and ensuring that older persons have adequate retirement
income. Australia has responded by mandating private
pensions.
Mandated employer-provided occupational pensions have been proposed
as a means of fostering retirement income security in the United
States, especially among workers in small businesses. The Bush
Administration has also proposed Social Security reform that would
involve private accounts where benefits would replace some of the
income from the traditional payroll-financed benefit. Australia may
serve as a test case for mandated, largely defined contribution
occupational pensions and their impact on employment, public
pension expenditures, economic growth, the substitution of private
for public retirement income benefits, and the ultimate well-being
of the aged.
