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The Retirement Security Project • National Retirement Savings Systems in Australia, Chile,New Zealand and the United Kingdom: Lessons for the United States

The Ret i rement Secur i ty Pro ject

The RetirementSecurity Project

NationalRetirementSavings Systems in Australia, Chile, New Zealandand the UnitedKingdom: Lessons for the United States

Nº 2009-1

David C. John and Ruth Levine


Advisory Board

Bruce BartlettWashington Times Columnist

Michael GraetzJustus S. Hotchkiss Professor of Law,Yale Law School

Daniel HalperinStanley S. Surrey Professor of Law,Harvard Law School

Nancy KilleferDirector, McKinsey & Co.

Robert RubinDirector, Chairman of the ExecutiveCommittee and Member of the Officeof the Chairman, Citigroup Inc.

John ShovenCharles R. Schwab Professor ofEconomics and Director, StanfordInstitute for Economic Policy Research,Stanford University

C. Eugene SteuerleSenior Fellow, The Urban Institute

Commonsensereforms,real worldresults

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Brookings Institution. This paper

is a part of the Retirement

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security through lifetime

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funded by the Rockefeller

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The Retirement Security Project • National Retirement Savings Systems in Australia, Chile,New Zealand and the United Kingdom: Lessons for the United States 3

IInnttrroodduuccttiioonnFinancial security in retirement is animportant goal for working families notonly in the United States. Retirees acrossthe globe typically rely on a combinationof public pensions (such as the U.S.Social Security system), private savings,and corporate pensions to pay their wayafter their paychecks have stopped.Modern industrialized countries,embracing the three-pillar philosophyadvocated by the World Bank andothers, have created complex pensionlandscapes that combine public andprivate provisions of old-age income.1

However, achieving this security is anincreasing challenge at a time whenstructural and demographic trends areputting ever-rising strains ongovernment-paid income programs forthe retired. Over the last severaldecades, many national pensionsystems have shifted some of thefinancial risk of retirement from society tothe individual. Employers have shiftedfrom defined benefit (DB) pensions,which guarantee retirees a regularpayment every month no matter howlong they live, to defined contribution(DC) retirement savings plans, whichleave it to retirees to put aside enoughmoney during their working lives to lastthem through their retired years.

Demographically, multiple factors are atplay. As life expectancy increases,pension accumulation must be larger tofund longer retirement. Entrance into the

labor force is increasingly delayed byprolonged higher education, thusshortening the number of years that aworker saves for old age. Although agood argument can be made forrestoring those lost years by delayingretirement, such a move is controversialand in many countries has yet to beeffectively implemented. In the UnitedStates pressures on the pension systembegan to grow as the oldest of the baby-boomer generation (those born between1946 and 1964, became eligible for earlyretirement in January 2008. The numberof boomers who reach retirement willsteadily increase until 2030, when the entireboomer generation will be eligible for fullretirement benefits. Because succeedinggenerations will be smaller, there will befewer workers to pay boomers allpromised Social Security and health carebenefits at the same time that healthcare and other costs are growing.

As a result, Americans today faceprecarious retirement prospects thathave only been made worse by therecession that began in 2007. In 2008,64 percent of Social Security recipientsdepended on the program for half ormore of their income.2 The programprovided 90 percent of income or morefor about one-third of recipients. Facingboth funding pressures on SocialSecurity and the results of the shift fromdefined benefit to defined contributionplans, it is only logical that a growingproportion of Americans lack confidencein their ability to live comfortably in



retirement. The Gallup Economy andPersonal Finance Poll indicates that only46 percent of American workers in 2007expected to have sufficient funds to livecomfortably in retirement, compared with59 percent five years earlier.3

These trends are not unique to theUnited States. Facing similar dilemmas,the rich countries of the Organization forEconomic Cooperation and Development(OECD) have cut their public pensionpromises by an average of 22 percentsince 1990 through various pensionreforms.4 These cuts have been implementedin a variety of ways, many of which areso complex that their full effect will notbe apparent to workers until they retire.

A few countries have coped withprojected rises in public pension costsby adding a personal savings elementthat either supplements or in a fewcases replaces the tax-financed publicpension. The rationale behind thesesavings systems is that individualsshould bear a greater portion of the costof their own retirements. Because it isnaïve to expect every worker to becomea financial expert, these countries havecreated systems that make it easier forworkers both to participate in investmentdecisions and to make appropriateinvestment choices. Using eithermandatory participation or automaticenrollment, the national savings systemsstudied in this paper attempt to ensurethat individuals will see their savingsgrow without having to acquire extensiveknowledge or pay for expensiveindividualized investment advice.

This paper examines the current andplanned retirement savings plans of fourcountries with unique pension systems—Australia, Chile, New Zealand, and theUnited Kingdom—and attempts to drawlessons for U.S. policymakers to use intheir efforts to build a more sustainablepension system that can provide increasingretirement security for future generations.

CChhiilleeIn 1981 Chile replaced its pay-as-you-goSocial Security system with a fullyfunded private pension system based onindividual accounts managed by privatepension fund managers known as AFPs(Administradoras de Fondos de Pensiones).All new wage and salary workers joiningthe workforce after 1981 had to join theAFP system, while existing workers as ofthat date had the option of either movingto the new system or acceptingwhatever benefit the old system wouldbe able to pay. Aided by majorincentives to switch to the post-1981system, 97 percent of Chileans whocontributed to a pension plan were in thenew system by 2004.

SSttrruuccttuurree ooff tthhee SSyysstteemm

In the individual accounts system, allformally employed workers are requiredto have 10 percent of their earningsautomatically deducted to fund theirretirement as well as disability andsurvivor insurance. In addition, workershave an additional 2–3 percent of paydeducted to cover administrative costsof their accounts, for a total deduction of12–13 percent.5 Employers are requiredto send the employees’ contributions to



However, to date, few if any retirees havefinanced their pensions solely throughcontributions. Almost all of those whohave retired under the 1981 system hadat least a portion of their pensionsfinanced through recognition bonds.

RReecceenntt CChhaannggeess

Until a reform enacted in 2008, thepublic pillar guaranteed a minimumpension for participants whose pensionincome after twenty years of contributionsfell below 80 percent of the statutoryminimum salary. The minimum pensionwas paid on top of the worker’s regularpension to bring it to a certain level. InJanuary 2009 the minimum monthlysalary was 159,000 pesos ($254.40),and the minimum pension was 127,000pesos ($203.50).10 Additionally, forworkers who did not qualify for theminimum pension, a means-tested basicpension, called PASIS, gave benefitsequal to 50 percent of the minimumpension regardless of an individual’scontributions to the system.

The 2008 reform came in response toconcerns raised in a 2006 report aboutcoverage of both private and publicpensions, as well as about high costsamong the five pension administrators.Passed in March 2008, the Sistema dePensiones Solidarias revamped thepublic pillar, increased participation in theAFP system, and addressed severalother problems with the system. Thebasic PASIS pension, renamed the basicsolidarity pension (Pensión Básica Solidaria(PBS), was increased from 48,000 to60,000 pesos per month in 2008, and

the pension administrator of theemployee’s choice, which in turn creditsit to the fund or funds chosen by theemployee. Currently employees canchoose from among five pension fundadministrators, each of which offers thefour types of funds that are approved bythe government regulator.6

In addition to the mandatory contribution,workers are allowed to make voluntarycontributions to either their AFP accountor another voluntary retirement savingsaccount. Employers are not required tomake any contribution. Only about 10percent of workers make voluntarycontributions.7 Self-employed workersmay participate in the system voluntarily.

The transition to the fully funded systemin Chile was aided by a fiscal surplusresulting in large part from the sale intothe private sector of companies that hadformerly been nationalized and from thelarge number of working people relativeto retirees.8 The government continuedto fund the defined benefit pensions ofthe workers in 1981 who chose toremain in the old system and gaverecognition bonds to the workers whoswitched to the new system. Thesebonds, which mature when the individualreaches retirement age, pay a lump suminto their account that is based on theirlast twelve monthly contributions to theold system adjusted for both the numberof years they participated in that systemand an annuity factor.9 The switch to thefully funded system is now nearlycomplete; by 2025 the defined benefitpensions will be fully phased out.


fund with the lowest fees and allowsfunds to contract out the administrationof individual accounts. To increase thenumber of funds and competition in theindustry, insurance agencies will be ableto set up pension fund administrators assubsidiaries. To encourage voluntarycontributions to private accounts amongmiddle-income workers, those whoenroll in and contribute to voluntaryaccounts will be eligible for a subsidy of15 percent of annual contributions up to1.5 million pesos. Finally, a fund was setup for financial education to create anetwork of advisers for account holders.

PPaarrttiicciippaattiioonn aanndd CCoovveerraaggee

A major criticism of the 1981 law wasthat the new system failed to coversignificant portions of the Chileanworkforce. Although the reform includeda mandatory contribution rate for allwage and salary workers, only 55 percentof the labor force actively contributed in2004, slightly below the pre-1981participation rate of around 63 percent.12

In both the old system as well as the1981 savings based system whichreplaced it, the self-employed, who hadthe option of participating or not, made upa significant share of the nonparticipants.In 2007 the self-employed constituted anestimated 28 percent of the workforce, butonly about a quarter of them regularlycontributed to an account managed by apension fund administrator. Only about60 percent of the self-employed wereaffiliated with an administrator at all, andonly 40 percent of those workerscontributed regularly.13

eligibility was broadened to workers inthe bottom 40 percent of the incomedistribution with twenty years of residencyin Chile. This is a noncontributory,means-tested pension paid to workerswho have no other pension.

The old minimum pension guarantee wasreplaced by the Aporte PrevisionalSolidario (APS) for those who havecontributed to a pension plan. The newprogram removes the former requirementthat a worker must contribute to apension account for twenty years inorder to qualify for the guarantee. Thesolidarity contribution provides up to17,000 pesos a month for individualswho have a self-financed monthlypension of between 50,000 and 70,000pesos in 2008.11 That amount graduallyrises to 255,000 pesos a month by2012.

The new solidarity pension and otherreforms are projected to cost 2.9 percentof GDP annually starting in 2008, fallingto 1.3 percent of GDP by 2025. Thesecosts are to be financed by a newpension reserve fund, which receivesboth part of the budget surplus (8.7percent of GDP in 2007) and revenuesfrom the production of copper. The fundhad about 1.1 billion pesos in 2008.

Other reforms to the pension systempassed in 2008 include mandatingparticipation of the self-employed andeliminating monthly fixed administrativefees that exist in addition to earnings-based fees. The law also assigns newlabor force entrants automatically to the



In addition, many Chileans work in theformal economy for just part of the yearor spend some time in the informaleconomy, and they do not contribute inmonths when they are not formallyemployed.14 A growing proportion of thelabor force is employed in temporary,seasonal, or part-time jobs rather than inyear-round, full-time jobs for the sameemployer. Thus, while 55 percent of thelabor force participated in 2004, it isunlikely that the same 55 percentcontributed for all twelve months of thatyear. One study found that only 20 percentof workers contributed 90 percent of thetime, while a similar proportion contributedonly 10 percent of the time.15

Sporadic work histories also limited theeffectiveness of the publicly financedsafety net before the 2008 reforms. Alarge proportion of contributors tomanaged pension accounts had apension financed by their savings thatwas lower than the minimum pensionguarantee. Unfortunately, a large andgrowing number of these workers wouldalso have fewer than the required twentyyears of contributions, thus making themineligible to receive the minimum pensioneven though it was designed to assistlower-income workers. In 2006 onestudy showed that 45 percent of pensionfund contributors had savings that wouldresult in a retirement benefit that wasbelow the guaranteed level. The studyfurther predicted that by 2025 virtually allworkers with pensions below that levelwould not have accumulated the requiredtwenty years of savings necessary toreceive the guaranteed amount.16

RReettuurrnnss aanndd CCoossttssRates of return on pension fund assetshave improved since the new systembegan in 1981. A 2006 study found thataccounts managed by pension fundadministrators had earned an annualaverage rate of return of 6.8 percentduring the previous ten years.17 Whenthe system began in 1981, these fundswere limited to investments in Chileanassets, with a large proportion going intoChilean government bonds. However,as the size of the funds grew, the supplyof bonds and other domesticinvestments was unable to absorb all ofthe savings. As a result, allowableinvestments were liberalized to includenon-Chilean assets, a development thatcontributed to increasing the return onthe funds. However, investmentregulations remain quite complex.

The pension funds are allowed to offeronly four types of investment funds,which differ in the percentage of totalassets that they may invest in equitiesand government bonds. Chilean workersare allowed to place their contributions ina maximum of two of the four funds.Each of the four types of funds has aperformance standard equal to theaverage rate of return of all of the fundsof that type over the previous three years.Each fund also has reserves it must useif it fails to meet the performancestandard. The government dissolves anyfund whose reserves are exhausted.

Fees and other costs imposed on savershave been another source of controversy.Despite efforts to increase competitiveness


of the pension funds, average costs rose5 percent between 1982 and 2003.18

Until 2008 two types of monthly feeswere allowed—-fixed administrative fees,and variable fees based on earnings—although only two funds maintained theirfixed fee. As noted, the fixed fees wereeliminated in the 2008 reforms. Theaverage earnings fee in 2008 was 1.71percent of a workers’ salary, a rate thatwas higher than all but two of the LatinAmerican countries with a Chilean-styleindividual accounts system.19

Because they compete by offering giftsand other incentives to potentialmembers, the pension funds have hadlittle incentive to lower fees. Fees havealso remained high, because until 2008 itwas very difficult for new funds to beformed, thus eliminating another level ofpotential competition. The law requiresthat the funds charge the same fees toall members regardless of the size oftheir accounts, a structure that effectivelysubsidizes members with larger accounts.Needless to say, the fixed fees have hada greater effect on the smaller accountbalances of low-wage earners. Decreasingcosts and increasing administrative simplicityof the pension funds were among themain goals of the 2008 legislation.

RReettiirreemmeenntt IInnccoommee

Despite problems with relatively lowcoverage and high administrative costs,the Chilean system’s average incomereplacement rates are projected to be onpar with OECD countries. Estimatesshow that after 2020, retirees will onaverage replace 44 percent of their

preretirement income. These highaverage replacement rates are likely theresult of the relatively high mandatorysaving rate of 10 percent. However,because the same savings rate is appliedto all income levels, the system also hasvery limited progressivity. A more seriousproblem is that the average replacementrate for women is projected to be nearlytwenty percentage points below that formales.20 On the plus side, the 10 percentcontribution rate may have contributedto the increase in national saving afterthe 1981 reform: as a proportion of GDP,national saving grew from less than 1percent in 1981 to 25 percent in 1990and more recently to 60 percent.21

Once pensioners reach retirement age,which is 65 for men and 60 for women,they can choose to annuitize theirretirement immediately, take programmedwithdrawals, or take a deferred annuitywith programmed withdrawals in theinterim. Early retirement is allowed forworkers whose savings can fund aretirement benefit equal to a set proportionof their average earnings over theprevious ten years. The benefit alsomust exceed the minimum pension by acertain level. Initially, workers had tohave a retirement benefit equal to atleast 50 percent of their earnings and110 percent of the minimum guaranteedpension. Starting in 2004 thesethresholds are gradually being raised;they will reach 70 percent and 150percent by August 2010.22 Previouslynearly 65 percent of men took earlyretirement, with their average retirementage being 56.



Before 2004 high transaction costs mayhave discouraged some individuals fromtaking their income as an annuity, buteven so in 2000, more than half of retireeschose annuities.23 Retirees couldpurchase an annuity from either aninsurance company or through anintermediary. Fees were unregulated andreached up to 6 percent of the value ofthe annuity.24

Reform in 2004 required providers tohave an electronic bidding system sothat the costs of different products wereclear for retirees. In addition, fees werecapped at a level that is reviewed everytwo years, a move that reduced the feesby more than half. Still, retirees whopurchase annuities tend to have largeraccounts than those who chooseprogrammed withdrawals. Thisdiscrepancy occurs in part becauseindividuals whose accounts near theminimum pension level are required totake a programmed withdrawal so that asmall proportion of their accounts will bepaid as fees rather than as retirementincome.25 Pension funds also charge afee for programmed withdrawals.

AAuussttrraalliiaaAustralia’s mandatory superannuationguarantee (SG) retirement savings systemrequires employers to contribute anamount equal to 9 percent of employeeearnings to individual retirement accountfunds. In addition, there is a means-tested, tax-financed Age Pension for allindividuals whose income and assets arebelow certain statutory levels. The AgePension has been in place since 1909,while the SG system’s universal mandate

for contributions was enacted in 1992. Itwas built upon a superannuation systemcreated in 1986 through a centralizedwage settlement that resulted in anemployer contribution of 3 percent ofearnings into individual retirementaccounts.26 Contributions to an SGaccount are taxed when money goesinto the account, as earningsaccumulate, and when savings arewithdrawn before the worker reaches theminimum distribution age of 55 to 60depending on a worker’s birth year.Before 2007, all distributions were taxed.By one estimate, taxes at various stagesof the process effectively reduced themandatory 9 percent contribution rate to7.65 percent before 2007.27

HHooww tthhee SSyysstteemm WWoorrkkss

Superannuation is available to all workersbetween the ages of 18 and 65 whoearn more than $450 (in Australiandollars) per month, although employerscan also choose to contribute on behalfof lower-earning workers. The earningsthreshold for low-income workers wasput in place to reduce the number ofsmall accounts that would be subject toproportionally high administrative fees,although the threshold has not beenchanged since the SG system began. In2006 only 7 percent of employeesearned less than $450 per month.28

Since 2007 annual tax-advantagedcontributions have been capped at $50,000;individuals may also make additionalvoluntary contributions of up to $150,000annually, but with no tax advantage.Individuals do not pay taxes on mandatorycontributions, although the investmentfund they go into pays taxes at a rate of


15 percent on both contributions andearnings. Contributions above $50,000annually are taxed at a rate of 31.5 percent.

The system for choosing investmentfunds changed substantially in 2005,when employees were given the ability tochoose which superannuation fund andinvestment portfolio to use. Employeeswere also allowed to decide whether toadd voluntary savings over the 9 percentrate. If an employee fails to make anactive choice, no additional savings arecontributed, the money goes to asuperannuation fund determined by therelevant industry or employer, and aninvestment portfolio is chosen by a fundtrustee.29 The savings in allsuperannuation funds are fully vested,portable, and preserved until thecontributor turns age 55, the earliest ageat which they can be withdrawn.

The Age Pension, the public pillar of theAustralian pension system, provides ameans-tested benefit for all individuals ofretirement age, regardless of theircontributions history. The amount of thebenefit is determined by both an assetand an income test. In addition,recipients must have lived in Australia forat least ten years and for fiveconsecutive years prior to applying.30

Workers who qualified for the full AgePension received a maximum fortnightlypayment in 2008 of $562 for singles and$939 for couples. This is equal to about25 percent of average male earnings.Payments are indexed to inflation andare usually adjusted twice annually. Inaddition, if the maximum benefit falls

below 25 percent of male weeklyearnings, it is adjusted upward at thesame time. Benefits are not taxed.

The income test reduces Age Pensionpayments by 40 cents for each dollarearned above the “free area” amountequal to $138 per fortnight for singlesand 20 cents for each dollar of incomeabove $240 per fortnight for couples.Adjustments are made for children.31

The asset test differs for homeownersand non-homeowners, though 90percent of the pensioners who did notreceive the Age Pension in 2004 weremade ineligible by their income ratherthan their assets.32, 33 Because homevalues are not part of the asset test,there have been charges that the systemis tilted toward benefiting wealthierindividuals who are more likely both toown a substantial home and to be ableto adjust their assets to receive a benefit.Because receiving the Age Pensionbrings with it additional government-provided benefits, workers try to adjusttheir retirement incomes to qualify for atleast a minimal amount.

PPaarrttiicciippaattiioonn aanndd CCoovveerraaggee

Roughly two-thirds of retirees currentlyreceive the full value of the Age Pension,and just under 50 percent of all pensionwealth is publicly provided.34 Thesenumbers, however, are expected todecrease over time as thesuperannuation guarantee systemmatures. The existing mandatory savingrate of 9 percent was reached only in2002, and the proportion of Australianworkers with superannuation guarantee



seeking comments on how to reducelost participants was the first steptoward creating a system to track andautomatically consolidate lost accounts.

Additionally, the mandatory nature of thesystem may mean that superannuationfund contributions crowd out privatehousehold saving. A study by Connollyand Kohler using annual data from 1966to 2002 found that every dollar saved byhouseholds as part of the 9 percentmandatory contribution reduced voluntarysaving by 38 cents. Therefore, net newsaving as a result of the SG system isabout 62 cents per dollar saved.41

RReettuurrnnss aanndd CCoossttss

Before the sharp drop in world marketsthat began in the second half of 2008,the average five-year nominal returns onbalanced SG retirement funds in 2008were roughly 8 percent, an increase overthe 5 percent yields from 2004 and2005.42 But even before the marketdrop, some concerns were expressedthat returns were too low. Althoughemployees were given a choiceregarding which superannuation fund tojoin starting in 2005, there remain noperformance standards or regulationssuch as the US Qualified DefaultInvestment Alternative to specify how anemployee’s retirement savings in a 401k-type account should be invested if theemployee does not designate a fund.Thus, each fund could have a differentmix of investment types, making directcomparisons between funds difficult.

There are four major types of SG

accounts has increased from under 50percent in 1988 to over 90 percent in2004.35 As more of these accounts grow,the government expects fewer people tobe eligible for the Age Pension, thusreducing government outlays.

In recent years, Australian pensionershave on average seen large increases intheir account balances: by 49 percentbetween 2004 and 2006 for men; and by30 percent for women. In the aggregate,superannuation funds increased from$135 billion in 1991 to $625 billion in2004. Australia now has more money percapita invested in managed funds thanany other country, in part because of thenew system.36 Projections show that by2020 the total value of superannuationfund assets will exceed 110 percent ofGDP.37 However, these projections weremade before the global financial outlookworsened, and in 2008, the average valueof SG funds declined by about 19.7 percent.38

One weakness in the SG system is thatthe self-employed are exempt from themandatory savings requirement. Policymakershope that a new superannuationclearinghouse (discussed below) will helpincrease participation among theseworkers. Another problem is the largenumber of “lost accounts” created whenparticipants switch jobs withoutconsolidating their accounts. By 2008there were over 6.4 million lost accounts39

containing $12.9 billion in assets40,accounting for one in five SG accounts orone lost account for every two Australianworkers. A government discussionpaper released in November 2008


The 2005 legislation allowing employeesto choose their preferred superannuationfund and investment portfolio wasintended in part to improve the netinvestment returns by using competitionto put downward pressure onunnecessarily high fees. However, initialsigns were discouraging. In a survey bythe Australia and New Zealand BankingGroup after the reform passed, only 55percent of respondents were aware oftheir ability to choose a fund andinvestment portfolio. Additionally, while77 percent of respondents could identifythe best indicator of fund performanceas returns minus fees, only 37 percentindicated that they would take fees andcharges into account when choosing afund.46

A new superannuation clearinghouse,scheduled to begin operation on July 1,2009, may help to reduce fees and willalmost certainly make it easier foremployers to encourage their employeesto choose which SG fund to join.47

Employers will be able to send all of theiremployees’ SG contributions to theclearinghouse, which will allocate theindividual contributions to the individualemployee’s chosen fund. According tothe government, use of the newclearinghouse will be optional and free toall employers with fewer than 20employees.48 Operation of theclearinghouse will be contracted out tothe private sector.

investment alternatives in the market: • Industry funds, set up by unions andgroups of employers, run by trustees,and open only to members• Public-sector funds, limited togovernment employees• Corporate funds, also known aswholesale funds, run by financialinstitutions for groups of employers • Retail funds, open to individualinvestors.

Individual retail funds have been availablesince the first superannuation reform in1986. By 2008 self-managed and otherretail funds held nearly 50 percent of allassets, while industry funds accountedfor 17 percent of assets, public sector funds15 percent, and corporate funds 5 percent.43

Administrative costs charged by thesefunds remain a concern. Annualexpense rates on corporate fundsbetween $50 million and $250 million insize were roughly 1 percent of assets in2001, while smaller retail funds weremore expensive at around 2 percent offund assets. Retail funds have highertotal administrative costs because manyof them charge both entry and exit feesas well as additional annual managementfees; these funds also pay more taxesthan public sector funds.44 Even today,fees are higher than those charged forcomparable investments in othercountries, averaging 1.25 percent ofassets according to Sen. Nick Sherry,Australia’s Assistant Treasurer.45 Sherrysays that his government hopes to seefees decline over time to 1 percent orless.



RReettiirreemmeenntt IInnccoommeeAt the time of retirement, which is 65years for men and 63 years for women,pensioners can choose to take theirbenefits as a lump sum or as an incomestream.49 Despite tax incentives forretirees to take an income stream, alarge majority opt for a lump sum. Ofthose who retired in 2000, 75 percent ofnew retirees chose a lump sum.50 SinceJuly 1, 2007, retirees 60 or older mayreceive funds in any form from theiraccount tax free if it was invested in anSG fund that paid taxes during theaccumulation stage. Almost all SGfunds are subject to these taxes.Workers who retire early can begin toreceive SG funds as soon as age 55 ifthey were born before July 1, 1960.This minimum distribution age graduallyincreases for those born after that dateuntil it reaches age 60 for those bornafter July 1, 1964.51

For the average male Australian earner in2007, average retirement income was 43percent of preretirement income, whilethe replacement rate net of taxes was56.4 percent. These are somewhatlower than the OECD averages of 59percent and 70 percent. Although cross-country comparisons of relativereplacement rates are complex,Australians’ retirement incomes onaverage are negatively affected by thedegree to which they rely on the AgePension. Two-thirds of retirees receivethe full amount of the public benefit, andonly 21 percent are able to liveprincipally off of the proceeds of their SGaccounts, although this proportionmainly reflects the fact that the SG

system is still relatively new. The netreplacement rate of an average earnerrelying on the Age Pension is only 37percent, and so average replacementrates should clearly increase as the SGsystem continues to mature.52

The distribution of retirement wealth isalso important in preventing old-agepoverty. The OECD uses a measure ofprogressivity of the pension system thatrelates the distribution of pensionearnings to the distribution ofpreretirement lifetime earnings.53 On thismeasure the reference points are a purebasic scheme that would give a flat-ratepension to all retirees (100 on the index)and a pure insurance scheme that wouldsimply aim to provide a 100 percentreplacement rate of preretirement income(0 on the index). Australia scores a 73 onthis measure, which compares favorablyto the OECD average of 37 and the U.S.score of 51. The progressivity of theAustralian system results in part from thesize of benefit given by the Age Pension;in 1991 it was surpassed only by Canadaamong the Group of Seven countries whencomparing minimum pension values.54

Options for increasing retirement incomethrough the SG system include encouraginghigher workforce participation byreducing early retirement and increasingthe number of hours worked among 55-to 64-year-olds. Currently labor forceparticipation rates are ten percentagepoints lower for this age group than forthe rest of the working-age population,and many older workers are part-timeemployees. Keeping contributors in theworkforce until age 65 would increase


their balances significantly, althoughnearly 40 percent of Australians aged 55to 64 suffer from at least one majorhealth problem, making it difficult tomaintain working hours.55

This and other changes may be possibleafter an Australian government commissionreviewing the nation’s tax system reportsin March 2009. That panel is chargedwith reviewing the SG system to determineif it meets the objectives of being broadand adequate; acceptable to individuals;“robust” in dealing with investment,inflation and longevity risk; simple andapproachable; and sustainable.56

NNeeww ZZeeaallaannddNew Zealand’s KiwiSaver program is theworld’s first nationwide, automaticallyenrolled, government-sponsored,voluntary retirement saving system.Launched on July 1, 2007, the programsupplements the New ZealandSuperannuation system, which pays aflat-rate individual pension currentlyfinanced from general tax revenues to allwho have lived in New Zealand for atleast ten years. By using an automaticenrollment system based on behavioraleconomics, KiwiSaver takes advantageof workers’ natural inertia to increaserates of retirement saving and directworkers into more appropriateinvestment choices than they might havemade under a traditional savings system.

TThhee SSttrruuccttuurree ooff KKiiwwiiSSaavveerr aanndd NNeeww

ZZeeaallaanndd SSuuppeerraannnnuuaattiioonn

After KiwiSaver’s launch, all employeeswere automatically enrolled in a savingplan upon starting a new job, while

existing employees and self-employedindividuals could join the plan voluntarily.Workers who are automatically enrolledmay opt out of the system completely aslong as they do so between thefourteenth and fifty-sixth day of theiremployment. Those who remain inKiwiSaver automatically save 4 percentof their income through April 1, 2009and 2 percent after that date57 unlessthey choose a higher savings rate58. Inaddition to the 2 percent and 4 percentsavings rates, there is an 8 percentoption. The plan does not allow any othersavings levels, but a worker can changefrom one level to the other at any time.

Participants can direct their savings intoany of the investment funds that havebeen registered with the government.Employees who do not actively make aninvestment choice are moved into anemployer-chosen fund. If the employerhas not selected a default fund, thegovernment randomly assigns theindividual to one of six veryconservatively managed default funds.59

The earnings on an individual’s retirementcontributions are taxed, although balancesare not taxed upon removal. Contributionsare locked into the system but areportable across jobs and funds. Earlywithdrawal of KiwiSaver funds is allowedonly for serious illness, significantfinancial hardship, or absence from NewZealand (presumably on a semi-permanentbasis) for at least twelve months. Inaddition, after three years of contributions,a member can make a one-timewithdrawal for the down payment on afirst home.



In normal circumstances, KiwiSavercontributions may be removed at thelater of either age 65 or five years aftermembership began. Members who havebeen participating for twelve months orlonger may interrupt their contributionsfor anywhere from three months to fiveyears as a “contributions holiday.”Additionally, some employer-sponsoredplans allow members to divert up to halfof their contribution to pay a mortgageunder the theory that mortgage-freehomeownership contributes to futureretirement wealth.60

Although participation in KiwiSaver initiallywas to be encouraged only throughautomatic enrollment techniques, thegovernment later decided to add aseries of financial incentives. Availablethrough April 1, 2009, the employee-targeted incentives are: • A “kick-start,” $1,000 tax-freegovernment contribution to eachKiwiSaver account upon enrollment,• A tax credit matching up to $20 ofcontributions per week between age18 and retirement,• A fee subsidy of $20 every sixmonths, and• A first home deposit (down payment)subsidy of up to $5,000 after three yearsof contributing to a KiwiSaver account.

Beginning in April 2008 employers werealso required to match employees’KiwiSaver contributions at a rate initiallyequal to 1 percent of income, to beincreased to 4 percent by 2011.61

Employers are rewarded as well for boththeir compliance with the match and any

optional additional contributions to KiwiSaver.Up to 4 percent of an employee’s grosspay, when contributed to a KiwiSaverplan, is exempt from the SpecifiedSuperannuation Contribution WithholdingTax, which is paid by the employer.Employers also receive a tax credit of upto $20 a week per KiwiSaver employee.62

The public portion of the retirement savingsystem is called New ZealandSuperannuation (NZS). This program aimsto provide more than a basic pensionbut less than complete replacement ofpreretirement earnings. Put in place in1977, the NZS provides a universal, flat-rate pension that is required to fall between65 percent and 72.5 percent of the netaverage earnings of employed NewZealanders.63 Eligibility is based simplyon whether a worker has been a legalresident of New Zealand for ten years;there is no income or asset test used indetermining eligibility. Benefits are subjectto income tax. Because it continues forthe entire life of a New Zealander afterretirement, NZS also protects against therisk of outliving one’s assets.

Faced with estimates that the cost of NZSwill rise to a point that future governmentswill be unable to fund it through generalrevenues alone, New Zealand created abuffer fund in 2001 that is in theorymuch like the U.S. Social Security trustfund. The government invests roughly $2billion annually (in New Zealand dollars)into the fund. No withdrawals are to bemade until 2027; thereafter the fund willbegin to pay for roughly 15 percent ofthe cost of NZS benefits.


CChhaannggeess aass ooff AApprriill 11,, 22000099

On December 15, 2008, a newly electedgovernment changed the incentives tosavers in order to reduce the overall costof the program. At the same time,minimum savings levels were changed tomake it easier for lower-income workersto participate. The changes went intoeffect on April 1, 2009.64

The revised law eliminated the annualgovernment subsidy of $40 to defrayadministrative charges on the KiwiSaveraccounts, abolished the weekly $20subsidy for employers, and reduced from4 percent to 2 percent of gross pay theexemption from the SpecifiedSuperannuation Contribution WithholdingTax of contributions to a KiwiSaver plan.At the same time, the mandatoryemployer contribution was frozen at 2percent of employee gross income,eliminating the scheduled rise to 3percent in 2009 and 4 percent in 2011.Employers were also prohibited fromreducing employees’ pay to offset thematching contribution to KiwiSaver.

In addition, the December 2008 lawaddressed concerns that the minimumsavings rate of 4 percent discouragedlower-income workers from participatingby lowering the default savings rate to 2percent. Existing KiwiSaver memberscould reduce their savings to the 2percent level at that time. It appears thatin the future, workers will be able tochoose from three savings rates, with 2percent joining the previously existing 4percent and 8 percent options.

PPaarrttiicciippaattiioonn aanndd CCoovveerraaggeeSince KiwiSaver is still very young, it isdifficult to say how the program willaffect retirement saving patterns in thefuture. Thus far, however, it appears thatthe participation rates among workersare exceeding the assumptions made bythe Treasury before the program began.At that time, the Treasury predicted onlya 7 percent participation among workersaged 18 to 64 in 2008, rising to 25percent in 2014.65 However, 39 percentof respondents to a survey conducted inJune 2008 reported that theyparticipated in some workplace savingscheme, an increase from 27 percent inOctober 2007.

Of the 500,000 KiwiSaver members asof March 20, 2008, approximately 32percent had been automatically enrolledand another 16 percent had opted inthrough an employer. The remainderopted in through a financial servicesprovider. An additional 99,000 peoplehad been auto-enrolled but opted out ofthe system. Just over half of themembers were female, and about 20percent were 55 or older.66

There is some question about how muchof KiwiSaver accounts represents newsaving or reduced consumption and howmuch substitutes for other forms ofprivate saving.67 Additionally, as a resultof the contribution holiday, it is possiblethat some participants will contribute foronly twelve months to receive the initial$1,000 “kick-start” incentive and thencease making any contributions for thefollowing five years.



In 2007 NZS was still the primary sourceof retirement income for over 70 percentof the population aged 65 and up.Although that proportion is likely to dropas KiwiSaver accounts mature, the costof providing NZS will not be affectedsince all workers are covered, regardlessof income. Moreover, the proportion ofthe 65-and-over population is projectedto double by 2050, so the cost ofproviding NZS will rise from its currentlevel of 4.6 percent of GDP to over 6percent of GDP. Options that have beenmentioned to decrease the costs of theprogram include targeting benefits,increasing the residency requirement,increasing the eligibility age, or reducingthe average replacement rate of benefits.

On top of the NZS, the cost of incentivesfor consumers to join KiwiSaver isprojected to add roughly $2 billion (20percent of the net costs of the NZS) tothe cost of government retirement savingprograms by 2016.68 The high cost ofincentives to encourage participationraises the question of whether KiwiSavermembership should be madecompulsory, as is the SuperannuationGuarantee in Australia, or whether theNZS and KiwiSaver should becoordinated in some way that mightallow some recapture of all or a portionof those incentives from upper-incomeworkers. Another question is whetherthe incentives are really necessary in thelong run, or whether automaticenrollment alone would be sufficient toensure optimal participation.

RReettuurrnnss aanndd CCoossttssAverage five-year returns on balancedfunds in New Zealand have been roughly4.5 percent in nominal terms.69 Currently,30 KiwiSaver providers offer participantsover 180 funds of varying investmentstrategies and risk. To be registered withKiwiSaver, a fund must meet certainregulations regarding asset allocation, butthere are no performance guarantees.The government negotiates the level offees and other costs funds may charge,but determining the cost for a particularfund can be complex, because up to tendifferent types of fees may be imposed.These include an annual fee measuredas a percentage of the total assets in thefund, a membership fee, entry or exitfees, and occasional legal or audit fees.Multiple reported cost numbers maymake choosing a preferred fund moredifficult for employees. The RetirementCommission, an autonomousgovernment entity that provides financialeducation and guidance estimates thatconservatively managed funds have totalannual fees of between 0.3 percent and0.6 percent of assets, while moreactively managed funds have fees ofaround 1 percent.

The six government-designated defaultfunds are required to be investedprimarily in cash, with only about 20percent of the total amount invested ingrowth assets. However, fees chargedby the default funds vary, raising anequity question because workers whodo not choose another fund arerandomly assigned to a default fund.


Financial education in New Zealand,which has been used as a model forother countries, is important both formaximizing individuals’ retirementincomes and for maintaining competitionand low costs among the investmentfunds. The website Sorted, started bythe New Zealand government in 2001,provides a number of easy-to-usefinancial planning calculators andguides.70 Additionally, there are plans toinclude financial education, which isalready available in the workplace, inschool curricula as well.


Replacement rates in New Zealand arelow relative to Australia and the OECD,at around 39.7 percent gross and 41.7percent net of taxes.71 A study done bythe New Zealand Treasury suggests thatunder conservative assumptions aboutspending changes and consumptionpatterns after retirement, roughly 40percent of couples and 30 percent ofindividuals aged 45 to 64 are not savingenough for retirement. Under lessconservative retirement incomeassumptions (which require a lowersaving rate to achieve), estimates showthat closer to 20 percent of NewZealanders still have inadequatesavings.72 There are also concernsregarding the saving patterns of youngercohorts, although such patterns aredifficult to measure empirically. Someanalysts believe that younger NewZealanders have greater access to creditand thus will have more debt than didtheir parents’ generation.

That said, labor force participation ratesamong those aged 50 and older havebeen increasing significantly, withworkers in this category accounting forhalf of the total growth of the labor forcefrom 1991 to 2005.73 In 2006, 43percent of men and 25 percent ofwomen aged 65 to 69 were in the laborforce, one of the highest participationrates among older people in the OECD.

In 2007 pension wealth contributed only2 percent of total net wealth of couplesaged 45 to 54. Other financial assetsmade up 44 percent of wealth andhousing equity was 22 percent, with thevalue of NZS benefits making up thebalance (32 percent).74 The small roleplayed by pension wealth helps toexplain the paucity of annuities that aretaken in New Zealand. Individualretirement accounts are also relativelysmall in size. The thin annuities marketmay begin to grow once KiwiSavermembers start to accumulate significantlevels of retirement savings and need asource of permanent retirement income.Several barriers to the development ofthe annuities market exist on both thesupply and demand side. These includerisks to the insurance companies thatincreasing life expectancies will makeannuities more costly, the fact thatannuity income is taxed at a higher ratethan other income, the perception thatthe NZS makes annuities, and the fear ofdying before receiving the full benefits ofthe annuity.



The distribution of retirement income inNew Zealand is flat relative topreretirement income. The progressivityindex calculated by the OECD is 100 forNew Zealand, meaning that the incomedisparities between the highest and thelowest earners among retirees areamong the lowest in the 30 OECDcountries. Retirement income replaces81 percent of pre-retirement income forNew Zealanders who earned an averageamount equal to half the country’saverage male earnings level, nearlydouble the replacement rate paid toretirees who earned average earnings.The degree of equity in retirementincome is likely because pension wealth,which is linked to preretirement earnings,makes up such a small percentage oftotal retirement wealth, and because theNZS is universal.

UUnniitteedd KKiinnggddoommThe pension system in the UnitedKingdom is exceptionally complex, withtwo levels of public pensionssupplemented by a two-part, means-tested program. The interactionbetween the differing public programs isoften confusing, especially when theworker also has additional definedcontribution or defined benefit plans ofsome form. The one constant in thepublic pension system over the lastseveral decades has been change. Tosome extent this is the result of thecountry’s tax system, under which taxesand tax preferences appear, change, anddisappear almost annually. In addition,over the last few decades, the benefitscalculation under the two public pensionbenefits has changed several times, and

the two means-tested benefits havebeen created. These changes haveconfused British workers, and theinteraction between the various publicplans has discouraged nongovernmentalpension saving.

Now, the system is evolving again. Ifrecently proposed reforms are put intoplace as planned, the United Kingdomwill offer its citizens a major new pensionsaving system that should greatlyincrease retirement security. Recenthistory suggests that future governmentsmay continue to tinker with the system.

SSttrruuccttuurree ooff tthhee SSyysstteemm

In the current public pension system, thefirst tier, known as the Basic StatePension (BSP), is a flat-rate pension.Men who make a National Insurancecontribution (NIC) for at least forty-fouryears and women who contribute forthirty-nine years receive the full value ofthe pension, and those who contributefor fewer years receive a proportionallylower amount.75 Through April 2009, afull basic weekly pension was 90.70British pounds for individuals and 145.05pounds for couples.76

Initially, the BSP was indexed to growthin average earnings, but in 1981 thatwas changed to indexation by inflation.The result has been a gradual butdramatic decline in the amount ofpreretirement income that the BSPreplaces. At the time indexation waschanged in 1981, the BSP amounted tojust below 30 percent of average incomeat age 50. By 2000 it had declined to20 percent, and if inflation indexation


remains in place, it would reach 10percent by about 2040.77

To supplement the BSP, a means-testedPension Credit was introduced in 2003to benefit pensioners with low or zeropersonal savings. The credit has twoparts. First is a universal creditregardless of the amount or years ofNational Insurance contributions paid bythe worker. It is intended to raise thepensioners’ weekly income to roughly 20percent of average wage and salaryearnings, an amount equal to 124pounds for individuals and 189 poundsfor couples in 2008. Individuals over age65 can also benefit from the second partof the Pension Credit: an additionalpayment known as the Savings Credit,which pays retirees an amount equal tothe value of 60 percent of all theirprivately financed retirement income.78

This second part of the Pension Credit,which in theory rewards retirees for havingsaved, pays up to 20 pounds a week forindividuals and 26 pounds for couples.

The Pension Credit is controversial forseveral reasons. First, British workersmust apply for it, and the application issomewhat detailed. At the time that itwent into effect, there was concern thatsome older pensioners would be unableto understand the process or might bediscouraged by the amount of informationit required. Second, because thesecond part of the Pension Crediteffectively reclaims about 40 pence perpound of savings, there are fears that inpractice, it would discourage workers,and especially moderate-income

workers, from saving for retirement.Finally, there were fears that because ofthe declining value of the BSP, an ever-growing proportion of future retireeswould qualify for the Pension Credit.This last concern was potentially dealtwith in the 2007 Pensions Act, which isintended to increase retirement savings.

In addition to the BSP, a second tier,now known as the State SecondPension (S2P), is the earnings-relatedportion of the public pension system.Initially created by a Labor Partygovernment in 1978 and known then asthe State Earnings Related PensionSystem, this program pays workers abenefit based on earnings between a“lower earnings limit” and an “upperearnings limit.” In 2009 S2P benefitswere based on earnings between 4,680and 40,000 pounds, a range that isadjusted regularly. Before 2003 the S2Pprovided a replacement rate of 20percent of average lifetime earnings forworkers between the earnings limits.79

That rate, set in 1988, was a reductionfrom the 25 percent replacement rate setwhen the program was adopted in 1978.Government actuaries belatedlydiscovered that using the 25 percentreplacement rate would far exceed whatthe government would be able to pay.

Since 2003 S2P benefits have dependedon earnings on the job. For purposes ofcalculating their eventual pension benefit,workers with 2009 earnings greater than4,680 pounds but less than 13,500pounds would be credited with a 40



percent replacement rate for earningsbetween those amounts. Workers wouldreceive credit at a marginal 10 percentrate for earnings between 13,500 and31,100 pounds, and 20 percent forearnings between 31,100 and 40,040.The same calculation would be made foreach year of earnings to determine theS2P benefit. The 2003 reforms, whichwere intended to increase benefits formoderate-income workers, represent anintermediate stage before the S2Pbecomes a flat benefit. Starting in 2010,the upper two bands will merge andprovide a 10 percent replacement rate,before it is replaced with a flat ratebenefit by approximately 2030.80

Since its creation in 1978, one of theS2P’s signature features has been theability of participants to “contract out”through participation in an employer-sponsored retirement plan. If they do so,both the employer and the employeepay lower National Insurancecontributions. Individuals who are notcovered by a pension plan or retirementsaving plan at work may also contractout of this part of the public system planby choosing a stakeholder pension or apersonal pension. In that case the NICrates are not decreased, but thegovernment rebates the contributions byplacing them directly into the individualretirement account. All private retirementaccount contributions are pretax. Someindividuals may choose to have a“rebate-only” private pension—that is,one that consists only of the NIC rebatesand is worth roughly the same as theState Second Pension.

The ability to contract out caused amajor “mis-selling” scandal in the late1980s and early 1990s after thegovernment passed a law forbiddingemployers to require workers toparticipate in their pension plan.Instead, employees had the ability towithdraw from the employer’s plan andstart their own personal retirementsavings plan. Companies immediatelystarted to market to employees, urgingthem to join a personal plan, but failing inmany cases to disclose that workerswho did so would lose any contributionsthat the employer would have made,thus leaving the employee worse off.The ensuing scandal and several othermis-selling scandals forced financialservices companies to make reparationsto affected workers and to greatlyincrease the advice given before aworker could invest with them. Althoughapparently caused as much by insuranceand other sales agents who hadpreviously sold other types of productsand may have been honestly unfamiliarwith the details of retirement savingsproducts as by intentional deception, thescandals greatly weakened public trustin retirement savings plans.

At one time, the United Kingdom had alarge system of employer-basedretirement plans. In 1979 almost 65percent of all workers were enrolled in anemployer-based plan, but since then, therate of participation rate has declined,falling to roughly 55 percent in 2004.There were 2 million fewer members in2004 than in 2000.81 This decline isclosely related to the closure of many


large and small defined benefit plans, inpart because employers shifted todefined contribution plans to escape theincreasing cost of DB plans caused byrising life expectancies.

Previous reforms sought to increaseretirement savings through a system ofstakeholder pensions, which can beemployer-based or owned by anindividual whose employer does not offerany form of retirement plan.82 Offeredstarting in 2001, stakeholder pensionsare extremely simple and haveadministrative fees capped at amaximum of 1 percent of balances.Employers with more than fiveemployees were required to offer theiremployees these accounts, butenrollment was not automatic and manyemployers did not promote them, sorelatively few stakeholder accounts wereopened. In addition, most financialinstitutions complained that the fee cap,which included all advertising costs,made stakeholder accounts unprofitableand so did not promote them. The failureof stakeholder pensions resulted in thepersonal accounts plan enacted in 2007.

RReecceenntt RReeffoorrmmss TTaakkiinngg EEffffeecctt iinn 22001100

In response to the continuing debate overpensions, the U.K. government passedthe Pensions Act of 2007, which willmake substantial changes beginning in2010. The reforms are intended to simplifythe private saving system, increasesaving, and avoid undersaving amongmoderate and low earners. The law: • Reduces the number of years ofcontributions necessary to qualify for

full Basic State Pension benefits tothirty years for both men and women.• Allows pensioners to claim statepension benefits based on theirspouse’s qualifying years of contributionsand earnings at any time afterretirement age, rather than only afterthe spouse claims his or her pension.• Indexes the basic state pension toaverage annual earnings rather than toprices (although the exact date thatthis will happen is uncertain).• Simplifies the State Second Pensionso that the lowest income band willaccrue benefits at a flat rate of 1.40pounds weekly and the top two bandsof earnings will be combined so thatthey both accrue benefits at 10percent of earnings.• Increases the state pension age byone year per decade between 2020and 2050 (reaching 68 eventually) foreveryone born after April 1959. • Abolishes contracting out of the S2Pinto employer-sponsored definedcontribution and stakeholder plans(but not defined benefit plans).

PPeerrssoonnaall AAccccoouunnttss

Perhaps most important, the 2007 lawestablished a system of voluntary,automatic enrollment, private retirementaccounts that will begin in 2012. Thepersonal accounts system will enable allworkers to have an occupational pensionplan that has low fees and charges. Theplan would be administered by anindependent administrative body.



All employees and workers between 22and the state pension age who are notalready in an occupational pension planand whose annual earnings exceed aspecified amount—5,035 pounds in2007—will be automatically enrolled inan account.83 Enrollees may opt out ofthe plan, subject to automatic reenrollmentevery three years.

Nonworkers, below-threshold earners,and the self-employed may opt in butwill not be eligible to receive an employercontribution. Employees will contributean amount equal to 4 percent of pay,which will be combined with amandatory 3 percent contribution byemployers, while the government willprovide roughly 1 percent through taxrelief, for an overall default contribution of8 percent.84 Annual earnings over aspecified limit— 33,540 pounds in2007— will not be subject to personalaccount contributions, and annualcontributions are limited to not morethan 5,000 pounds per year. Individualsmay not consolidate other retirementsavings into their personal accounts.

The personal accounts system isintended to increase private retirementsaving, lower the government’s liabilityfor state pension payments, and raiseaverage replacement rates. As is thecase with automatic enrollment in NewZealand, the U.K. system intends to takeadvantage of employee inertia toincrease participation rates. Estimatesproduced by the Department for Workand Pensions based on survey data ofindividuals’ attitudes toward the newprogram suggest that nearly 70 percent

of individuals are likely to remain in theiremployer’s plan or participate in thepersonal accounts system.85 If thisparticipation rate is accurate, 6 million to9 million workers would be saving morein their workplace pensions than they donow; 4 million to 8 million of these wouldbe new savers. Evidence from other U.K.automatic enrollment schemes hasshown that individuals who save as aresult of the automatic feature tend tohave lower-than-average incomes.

The new U.K. system will continue touse employer-based plans as itsfoundation. Employers with more thantwo employees and no other pensionplan are required to participate in thepersonal accounts system. At start-up,however, it would cover only largeemployers and then gradually beextended to small employers. Employersmay be exempt from the personalaccounts system and regulationsassociated with it if they choose toautomatically enroll employees in apension plan of equal or better value.86

Mandated matching employercontributions will increase costs for anestimated 670,000 employers thatcurrently do not offer a pension plan andfor an additional 240,000 employers thatcontribute at a rate below 3 percent ofincome. The total cost of additionalemployer contributions is projected to bebetween 1.8 billion and 2.9 billionpounds a year once the mandatory 3percent level is fully phased in.87 Someof these costs may be offset by lowerNational Insurance contributions,although employers indicate that some


of their costs may be covered by priceincreases or wage deductions.88

In the aggregate, the governmentprojects that the reform will generate upto 10 billion pounds per year by 2015 inadditional pension savings. Because oftax relief that is provided to savers, theseadditional savings will cost thegovernment an estimated 1.3 billionpounds in 2020 and 2.4 billion pounds in2050. Another cost will be corporate taxlosses as a result of decreasedcorporate profits stemming from highertotal employer retirement contributions.A portion of these tax expenditures andlosses will be offset by higher receipt oftaxes on pension income; the increase inself-provision for retirement will alsodecrease the cost of the means-testedPension Credit.

These results are questioned by anumber of private sector retirementprofessionals who believe that thepersonal accounts system willencourage employers that contributemore than 3 percent of workers’ incometo a retirement plan to reduce theircontributions. Still other employers maychoose to close their plans and to relyinstead on the personal accountssystem.

RReettuurrnnss aanndd CCoossttss

The administration of the personal accountssystem will be centralized to keep costslow. A clearinghouse collects thecontributions and allocates them to largeaggregate investment funds, where theywill be managed by private-sectorinvestment managers. A separate

administrative body manages the marketing,customer contact, and information, andissues statements to participants. Thegoal of the Pensions Commission is torun the entire personal accounts systemat a total cost of 0.3 percent of assetsper year. Regulating the types of fundsthat qualify under the personal accountsscheme will also help to ensure adequatereturns. Low fees will especially help inearly phases of the personal accountssystem when the funds are relatively smalland low fees will translate into higherreturns on investments.89

However, the 0.3 percent administrativefee is substantially lower than that chargedby many retirement plans, and it may bedifficult to achieve. Some studiessuggest that an annual fee closer to 0.5percent of assets is more realistic.


Participants in both the BSP and S2Pare eligible to retire at age 65 for menand 60 for women. Those ages are setto equalize gradually to 65 over theperiod of 2010–20 and then to rise to 68by 2050. Deferral of a state pensionbenefit is also allowed, and additionalbenefits accrue from the statutoryretirement age at a rate of 10.4 percentof earnings subject to National Insurancecontributions per year. Upon retirement,all balances in the public system (mainlythose in the S2P) are automaticallyannuitized. Balances accrued in individualor occupational private accounts mustbe annuitized by age 75 to the extentthat they are funded by NIC tax rebates.Seventy-five percent of any additionalretirement contributions must also be



annuitized by age 75, with the remaining25 percent being available for withdrawalin a tax-free lump sum. Pension annuityincome is taxed at the same rate asother income.

Although pensioner income in the UnitedKingdom has been increasing over thepast forty years, 44 percent of retireesstill rely almost entirely on state-providedbenefits, and the old-age dependencyratio is projected to double by 2030.State pensions are likely to provide lowerreplacement rates in the future, andbefore the 2007 reform, decliningparticipation in occupational plans furtherdepressed projections of futureretirement income. Without change, theparticipation-based state pensions wouldhave led to very low retirement incomesfor individuals who did not contributeconsistently to an employer-basedretirement plan over their working lives.Reliance on the means-tested PensionCredit would have created a higherimplicit tax on saving for an increasingpercentage of the population.90 Thegross replacement rate in 2007 for meanearners was only 30.8 percent, thelowest in the OECD. Net of taxes, theUnited Kingdom ranked a bit higher, witha replacement rate of 41.1 percent at themean of earnings. The OECD pensionprogressivity index for the United Kingdomwas relatively high at 81.1, although thisis a result of the low levels ofparticipation in occupational pensions.91

If the predicted levels of participation inthe personal accounts system after itgoes into effect in 2012 are accurate,

they will translate into increasedretirement saving for future retirees.Baseline predictions suggest that withthe minimum automatic contributionlevels, pension incomes for individualsaged 68 to 75 will have increased by 12percent in 2050. The replacement ratefor individuals who are 22 years old in2012 will be roughly 68 percent by thetime they reach retirement, and for thosewho are 40 years old it will be roughly 40percent.92 If individuals contribute morethan the automatic 4 percent of incomeinto a personal account, their replacementrate will be higher; survey data suggeststhat nearly half of those who stay enrolledin a private pension plan will contributeat a higher rate than the minimum.

The impact of the reforms on pensionprogressivity will depend largely onparticipation rates among low earners.This group is the most likely to benefitfrom the automatic enrollmentmechanism in the system. However, thecontribution from the government basedon tax relief will slightly disproportionatelybenefit higher-bracket earners.

The mandatory annuitization systemaims to ensure that retirees’ savings lastfor the remainder of their lives. Theregulation seeks to overcome marketbarriers that otherwise might suppressthe use of annuities: potential behavioralbiases that lower demand and adverseselection, and changing mortality risksthat would raise costs of annuities.Additionally, a portion of the retirementsavings that must be used to purchasean annuity is funded by tax rebates, which


the government believes should be usedfor income, and not to fund bequests.

The annuities market in the UnitedKingdom tripled between 1991 and2006 and is projected to increase furtheras private retirement funds shift towarddefined benefit plans.93 With theincrease in demand has come anincrease in flexibility for annuitants.Retirees are able to delay annuitizationuntil age 75, and providers havedeveloped numerous products that arespecific to differing lifestyles, healthstatuses, and number of dependents.Additionally, retirees now have the abilityto choose an open market option forpurchasing an annuity. Under this option,they can use an online tool that lists allpotential annuities that meet theirpersonal conditions and are available tothem, the costs of each option, and theweekly income each would provide. Thisenables retirees to search for the bestvalue on the market rather than beingtied to the same company that handledtheir savings.94

CChhaalllleennggeess FFaacciinngg tthhee UU..SS..RReettiirreemmeenntt SSaavviinngg SSyysstteemmIn the coming years, the United States islikely to grapple with a number ofchallenges as Social Security and privatepensions evolve. Social Security hasbeen technically insolvent for twenty ofits nearly seventy-five years, and theCongressional Budget Office projectsthat Social Security will be solvent onlyuntil 2019, after which it will spend morein benefits than it will receive in payrolland other taxes.95, 96 Although the

present value of total lifetime SocialSecurity benefits will be higher undercurrent law for future retirees than forcurrent retirees, the share ofpreretirement income that Social Securitywill replace will decrease.

Social Security’s impending insolvencyhighlights the increasing significance ofprivate sector accounts for futureretirees. Unfortunately, while participationin employer-provided private plans hasincreased significantly over the last sixtyyears, from roughly 24 percent in 1950to almost 50 percent in 2000, it hasremained relatively stable since the late1980s. Additionally, the creation ofindividual retirement accounts (IRAs) in1974 and reforms in 2001 have madesaving for individuals without anemployer-sponsored plan feasible andattractive through tax incentives.97 However,a large proportion of IRAs have beenopened by workers rolling over a 401(k)plan sponsored by a former employerafter leaving the job. Only about 10 percentof workers whose employers do notsponsor a retirement plan regularlycontribute to an IRA. About 37 percentof workers have neither an employer-sponsored pension plan nor an IRA.98

Coverage rates are lowest among low-income workers, 15-to-24-year-olds, andHispanic workers. Many of these workersare employed in a small business. Involvingthese groups in private accounts is oneof the main challenges for pension policy.

Employer-sponsored retirement planshave continued to shift toward definedcontribution plans, in which workers



contribute a portion of earnings into aninvestment account and receive benefitsthat are equal to their contributions plusinvestment returns. From 1975 to 2000the number of DC plans more than tripledto almost 700,000 accounts, while thenumber of private-sector defined benefitplans fell from 170,000 to under 50,000.In 2003, 58 percent of workers with aretirement plan participated in a DC plan,and that proportion is expected toincrease as time goes on. Small employerswith fewer than 250 employees accountfor a major part of the decline in DBplans.99 The shift to DC plans combinedwith the need to increase participationand the recent drop in asset values duringthe recession will frame much of thecoming discussion about the future ofthe U.S. retirement system.

LLeessssoonnss ffoorr tthhee UUnniitteedd SSttaatteess

MMaannddaattoorryy SSaavviinnggss vvss.. AAuuttoommaattiicc

EEnnrroollllmmeennttIncreasing the participation rate in retirementsavings accounts can be accomplishedthrough either mandatory participation orautomatic enrollment mechanisms.Evidence suggests that while a mandatorysystem clearly works, automatic enrollmentmay achieve similar participation rates ata lower political cost. Two of the fourcountries (Australia and Chile) in this studyhave a mandatory savings structure, whileNew Zealand uses automatic enrollment,and the United Kingdom is starting anautomatic enrollment system.

Both countries with mandatory systemshave the expected high participation rates.

As noted above, Chile’s participation rateis less than optimal, but this is explainedmore by the makeup of the workforcethan by anything else. One disadvantageof the mandatory system is that it mustallow people some ability to choose theirown contribution rates. In Australia, theeffort to find a least-common-denominatorcontribution rate has led to a decrease insavings rates for some participants.

It is too early to determine how the newautomatic enrollment systems in NewZealand and the United Kingdom will work.However, evidence from the United Statesshows that automatic enrollment can boostparticipation of eligible employees fromroughly 75 percent to between 85 and 95percent.100 The greatest increase comesfrom those with the lowest participationin the current system. One study showsthat with automatic enrollment employeeswith under $20,000 in earnings increaseparticipation rates from 13 percent to 80percent, and Hispanic workers’ ratesincrease from 19 percent to 75 percent.101

Additionally, making enrollment eligibilityuniversal would allow participation by the50 percent of workers who currentlyhave no access to a 401(k) plan.102

DDeeffaauulltt IInnvveessttmmeenntt CChhooiicceess

Setting appropriate default investmentoptions is a critical part of improvingretirement income. Overall, limitinginvestment options works much betterthan providing a long list of choices.Even in Chile, where there was ameasure of consumer choice andcompetition among providers, the actualinvestments were limited to a select few


fund types, and their structure wasdictated by a government agency.Similarly, New Zealand randomly placesparticipants who do not choose aninvestment fund into one of six defaultfunds, and the coming individualaccounts system in the United Kingdomwill also have both a default and a verylimited menu of other choices. This isalso true in the industry funds ofAustralia, where most participantsremain in a trustee-selected balancedportfolio of investment choices.

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International experience shows that thebest way to keep administrative costslow is to provide a simple investmentplatform with default investment fundsand a high proportion of index-typefunds. Chile, the only country studied inthis paper without such a structure, hashigher fees than its neighbors that haveadopted similar individual accountsystems. While rival administrators inChile do compete among themselves,they try to lure depositors with gifts ratherthan more economically priced services.

Costs in New Zealand, which does havea simple investment platform with adefault investment option, appear to befairly low, although that will only be clearafter the system has been in operation fora longer time. Australia’s superannuationclearinghouse, which started operationson July 1, 2009, and will help to directcontributions to investments, wascreated in response to complaints aboutfee levels in that system.

Meanwhile, the personal accountsreform in the United Kingdom will use acentralized administrative body to helpkeep costs well below those that can befound in other parts of the country’sfinancial system, but its target level foradministrative costs of 0.3 percent ofassets was chosen by a governmentalbody and may not be achievable forsome time, if at all. A simple centralizedinvestment mechanism appears to havea better chance of keeping fees low inmuch the same way as the U.S. ThriftSavings Plan (TSP) has kept costs downfor federal employees. The TSP has acentralized administration and record-keeping agency that tracks participants’contributions and allocates them tochosen funds. Fees and expenses forTSP funds have been very low sincetheir inception; in 2007 expenses wereonly .015 percent of assets.103 Both NewZealand’s KiwiSaver and the comingU.K. system are based on the TSP.

A simple retirement system also increasesthe ability of workers to understand itand to be able to predict their retirementincome. An extremely simple systemsuch as that in New Zealand is probablythe easiest for participants to understand,while the very complex U.K. system hasleft many workers both confused andnervous that their retirement income willbe inadequate.

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A clear lesson from the United Kingdomis the need to avoid constant changes inretirement savings systems. Since thecreation in 1978 of what came to be



known as the State Second Pension,successive governments have changedreturns on contributions and the overallstructure of the system itself. Returnswere reduced for everyone in 1988, andwere changed into a progressive systemin 2003, with further changes comingthat will turn the system into a flat benefit.Admittedly, the first change wasnecessitated by poor actuarial work thatprovided workers with more for theirsavings than the government couldafford. But British governments havebeen unclear about the purpose of S2Pand who should benefit from it. Theresult has been to confuse potentialsavers about what their retirementbenefits will be and, in many cases,whether they should even save at all.

More recently, New Zealand’s KiwiSaverplan had a series of incentives added toit just before the plan opened, only to havethe incentives pared back and other changesmade shortly after the governmentchanged hands. If these sudden shiftscontinue, they could damage publicsupport for the plan. On the other hand,recent reforms in Chile were clearlymade after serious consideration of theplan’s shortcomings. Clearly, plans mustchange with the nation’s economy, butchanges should come only after seriousconsideration of long-termconsequences.

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While augmenting public pensions withretirement income funded by privatesaving is desirable and even necessary,adequate income guarantees remain

crucial. New Zealand’s universal pension,indexed to wage growth and restrictedonly by residency, is the most progressiveand simple sort of old-age guaranteeconsidered in this paper. It covers allretirees and does not create disincentivesto save through means testing, and itsfiscal costs are straightforward. InAustralia, once a significant proportion ofthe workforce has participated in thesuperannuation guarantee system foranother few decades, the means-testedpublic pension appears able to serve asan adequate safety net with fewdisincentives to save. The situationwould be greatly helped if some level ofannuitization were required to eliminatethe incentive to spend SG funds in orderto qualify for a public pension.

Conversely, the experience of Chile showsthat a low means-tested basic pension inconjunction with a participation-basedminimum pension leaves portions of thepopulation uncovered by public old-ageincome security. Although the minimumpension was supposed to serve as asafety net, its original structure failed tocover a significant proportion of thosewho needed it.

The U.K. system as it exists now is alsodeeply flawed by a basic public pensionwhose value continues to drop as aproportion of preretirement incomebecause it is indexed to inflation ratherthan wage growth. The complex,means-tested Pension Credit really onlyserves to mask the poor formulation ofthe Basic State Pension, and thegrowing proportion of British workers


who would have to rely on it emphasizesthe point. While the coming personalaccounts system and a return of theBasic State Pension to wage indexingwill improve the situation, more workremains to be done.

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A retirement savings system is only reallysuccessful if it both allows participants tobuild enough savings to provide lifetimeretirement income. The United Kingdomrequires the annuitization of at least 75percent of a worker’s pool of retirementsavings, while Chile requires eitherannuitization or a phased-withdrawalsystem. Neither Australia nor NewZealand has any such requirement, andefforts by Australia to encourageannuitization through favorable taxtreatment have been less thansatisfactory. New Zealand’s program istoo new to have any retirees as yet, andthe country’s existing pension systemfeatures minimal use of annuities.

Annuities pool longevity risk to insureannuitants against running out ofresources before death. Otherwise, withincreasing longevity, there is a very realrisk that a growing number of retirees willrun out of assets and end up living inpoverty. This issue is a key concern inthe United States, where 80 percent ofdefined contribution plans do not offeran annuity104. However, establishingmandatory annuitization such as in theUnited Kingdom requires the samepolitical consensus that a mandatorysaving program does, and that is noteasily achieved. Additionally, for many

lower-income retirees in the UnitedStates, an annuity may not be theoptimal choice given income securityprovided by Social Security.

Instead, it would be better to considersome form of system based onbehavioral economics that guidesretirees to annuitization but does notrequire it. While there is early work onsuch an approach, it does not exist inpractice. As a result, there is also noguarantee that behavioral approaches inpensions’ spending stage operate asthey have in the accumulation stage. Inthe interim while these policies are beingdeveloped, one avenue that should beencouraged in the United Kingdom is thetype of annuity comparison mechanismavailable in Chile and the UnitedKingdom, where consumers can see theavailable choices and costs of each. Thisat least allows consumers to make aneducated choice.

The worst approach to the spendingstage is to assume that the retirees areable to make appropriate decisions ontheir own. While the United States maynot be ready for mandatory annuitization,it does not have the option of ducking adecision on some form of annuitizationpolicy.

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The United States simply cannot affordto have about half of its workforceunable to take advantage of a simple,low-cost system of retirement saving.Most workers cannot afford to live inretirement on just Social Security



benefits, and that program’s comingfiscal problems make it very unlikely thatbenefits will increase. If younger workersare to have the same retirement securityas their parents and grandparents, theymust save for retirement from the timethey first enter the workforce until theyreach retirement age.

This does not imply that the United Statesshould adopt one of the systems studiedin this paper. Each system developedaccording to the specific culture andpolitical realities of the individual country,and each is a mixture of features that maymake sense only for that country. However,each of the four national systems offerspositive and negative lessons that arerelevant to U.S. policymakers. A U.S.system needs to reflect Americanpolitical and financial realities, but it canadopt certain components that haveworked elsewhere.

This does not imply that the U.S. systemmust have a centralized mechanismstyled after KiwiSaver or the coming UKpersonal accounts system, nor does ithave to be mandatory like Chile’s orAustralia’s. Automatic enrollment seemsto offer a better solution for the UnitedStates than does a mandatory system.If it proves not to greatly increaseenrollment over time or if certain ethnic,gender, or income groups end up beingunderserved, the United States couldconsider moving to a mandatory system.

Similarly, a decentralized systemcombined with some form of on-linecomponent that could match employerswith a financial-services provider

interested in their business may be moreefficient and faster to implement.However, if some segments of themarket are underserved and cannot getaccess to a cost-effective retirementsavings product, then some more formaland centralized system of providingaccounts will have to be created.Somewhat similar problems resulted inAustralia’s new clearinghouse.

Regardless of what system is chosen, itmust operate in tandem with the existingemployer-sponsored system, and not asan alternative to it.

Companies that offer their employees401(k)-type plans or traditional definedbenefit pension plans should not berequired to replace them with a newsystem. Instead, any additional systemshould apply only to companies that donot offer any type of retirement savingsplan or pension and to the self-employed.That is not to say that 401(k)-type plansare perfect. The results of the currenteconomic downturn show otherwise.However, nothing to date indicates thatthose workers would be better off insome new plan.

Each of the four countries surveyed hererecognizes that increased retirementsaving is essential to improvingretirement security and reducing thepotential cost of a taxpayer- financedpension system. None of their systemsare perfect, but all of them have positivefeatures. As U.S. policymakers seek toincrease the proportion of workers whosave for retirement, they can learn a greatdeal from exploring overseas systems.


EEnnddnnootteess::1The World Bank recommends a three-pillarapproach: public, mandatory private, andvoluntary private. World Bank, “Averting theOld Age Crisis” (Oxford University Press,1994).2Social Security Administration, “Fast Facts andFigures about Social Security 2008,”www.ssa.gov/policy/docs/chartbooks/fast_facts/2008/.3Dennis Jacobe, “Fewer Americans Expect aComfortable Retirement” (Washington: Gallup,2008).4The United Kingdom was one of two OECDcountries (along with Hungary) to see anincrease rather than reduction. Organization forEconomic Cooperation and Development,“Pensions at a Glance: Public Policies acrossOECD Countries” (Paris: 2007).5Mandatory contributions are required up toabout $2,427 in earnings per month. A 2006study found that less than 5 percent of AFPcontributors earned over this ceiling. Arenas deMesa et al, “The Chilean Pension Reform Turns25: Lessons from the Social Protection Survey,”Pension Research Council Working Paper 2006-9 (Philadelphia:2006). 6Mesa-Lago, Carmelo, “Assessing the WorldBank Report Keeping the Promise,”International Social Security Review, 58 (2-3):97-100, (2005).7Kritzer, Barbara E.“Chile’s Next Generation ofPension Reform,” Social Security Bulletin, 68(2): 69-84, (2008). 8Schieber, Sylvester J. and John B. Shoven,“Social Security Reform: Around the World in80 Ways,” American Economic Review, 86 (2):373-377, (1996).9Arenas de Mesa et al., (2006). 10Superintendencia Seguridad Social,Departmento Actuarial, “Variables PrevisionalesRelevantes; Vigentes al mes de Noviembre de2007.”http://www.suseso.cl/common/asp/pagAtachadorVisualizador.asp?argCryptedData=GP1TkTXdhRJAS2Wp3v88hMBrze0pOMpr&argModo=inline&argOrigen=BD&argFlagYaGrabados=&argArchivoId=535211Kritzer (2008). In December 2008, $1 =577.70 Chilean pesos at the time of writing.

12Mesa-Lago (2005). And the 1981 participationrate was significantly lower than that in the1970s.13Solange Berstein, “The Chilean PensionSystem: Facts and Challenges,” Superintendentof AFP, Presentation for the OECD (Chile:2006). 14Kritzer 200815Bernstein, Solange, Guillermo Larrain, andFrancisco Pino, “Chilean Pension Reform:Coverage Facts and Policy Alternatives,”Journal of Latin American and CaribbeanEconomic Association, 6(2):227-279, (2006), ascited in Kritzer (2008).16Kritzer (2008). 17Marcel Commission, Consejo AsesorPresidencial para la Reforma Previsional, “Elderecho a una vida digna en la vejez: Hacia uncontrato social con la prevision en Chile,”(2006). www.consejoreformaprevisional.cl18Alberto Arenas de Mesa and Carmelo Mesa-Lago, “The Structural Pension Reform in Chile:Effects, Comparisons with Other LatinAmerican Reforms, and Lessons,” OxfordReview of Economic Policy, 22(1): 149-167(2006). A 2002 law created the four differenttypes of funds that exist today and made itpossible for contributors to have two accounts.Still, the three largest funds make up 80 percentof the market. 19Kritzer (2008). Both Argentina and Peru hadhigher fees as measured by a percentage of themandatory contribution. However, Chile’s feeswere not significantly above the 12+ percentcharged in Colombia, El Salvador, Mexico, andUruguay.20Bernstein, Larrain and Pino (2006). 21Arenas de Mesa, 2005.22Kritzer 200823James, E. and Song, X, “Annuities MarketsAround the World: Money’s Worth and RiskIntermediation,” World Bank Working Paper(2001).24Kay, Stephen J. and Barbara E. Kritzer, “SocialSecurity in Latin America: Recent Reforms andChallenges,” Economic Review – FederalReserve Bank of Atlanta, First Quarter: 41-52. 25Bernstein, Larrain and Pino (2006). 26Hazel Bateman and John Piggott, “Australia’sMandatory Retirement Saving Policy: A View



from the New Millennium,” Research paper 19(Sydney: Australia School of Business,Retirements Economics Group, 2000). 27Dunsford, G. and M. Rice, “RetirementIncomes Integration – Superannuation, SocialSecurity & Taxation,” Institute of Actuaries ofAustralia, (Sydney: 2004); Ann Harding andSimon Kelly, “Funding the Retirement of BabyBoomers,” Agenda 11, no. 2 (2004), pp.99–112. 28Garry Barrett and Ye-Ping Tseng, “RetirementSaving in Australia,” Social and EconomicDimensions of an Aging Population ResearchPaper 177 (McMaster University, 2007).29Gerry Gallery and Natalie Gallery, “Paradox ofchoice in a Mandatory Pension Savings System:Challenges for Australian Retirement Income,”Policy and Politics, 33(3): 519-532 (2005).30Special residence requirements apply towidowed workers and certain other groups.31http://www.centrelink.gov.au/internet/internet.nsf/payments/age_rates.htm32For homeowners, the value of a home is notincluded in the assets test.33OECD, “Pensions at a Glance.” 34Ibid. 35Barrett and Tseng, “Retirement Saving inAustralia.” 36AFG Global Funds Management Index,http://www.smh.com.au/news/Business/Australia-tops-in-managed-funds/2006/01/23/1137864849431.html37Bateman and Piggott, “Australia’s MandatoryRetirement Saving Policy” World BankPensions Primer, (2001).http://wbln0018.worldbank.org/hdnet\hddocs.nsf.38Sydney Morning Herald, “Super Crunch Wipesout 3 Years of Gains,” January 22, 2009,http://business.smh.com.au/business/super-crunch-wipes-out-3-years-of-gains-20090122-7n7i.html39In a country of only 21 million people with aworkforce of 14 million in 2008.40Media release from the Minister ofSuperannuation and Corporate Law onNovember 14, 2008 and Discussion Paper –Superannuation Clearing House and the LostMembers Framework, Part B, released onNovember 14, 2008; see www.treasurer.gov.au.

41The study models saving as a function ofincome, wealth, and the degree of financialderegulation as measured by the ratio ofhousehold debt to income, in addition to adummy for the introduction of the SG. EllisConnolly and Marion Kohler, 2004, “TheImpact of Superannuation on HouseholdSaving,” Research Discussion Paper 2004–01(Sydney: Reserve Bank of Australia, 2004). 42www.fido.asic.gov.au/fido/fido.nsf/byheadline/Long-term+performance+figures+for+typical+super+fund+investment+options?openDocument43Ellis, Katrina, Alan Tobin and Belinda Tracey,“Investment Performance, Asset Allocation andExpenses of Large Superannuation Funds,Australian Prudential Regulatory AuthorityWorking Paper (Sydney: APRA, 2008).Theremainder of funds are in very small AustralianPrudential Regulatory Authority accounts 44Katrina Ellis, Alan Tobin, and Belinda Tracy,(2008). 45Rachel Alembakis, “Super System NeedsReform for Future,” Global Pension, February17, 2009.46Australia and New Zealand Banking Group,Ltd., “Adult Financial Literacy, Personal Debtand Financial Difficulty in Australia: SummaryReport” (2005),www.anz.com/aus/aboutanz/Community/Programs/pdf/ANZ_SumReport_FA. pdf47Media release and discussion paper from theMinister of Superannuation and Corporate Law. 48According to the government, 90 percent of allAustralian employers have fewer than twentyemployees.49The retirement age for women is scheduled toincrease to 65 by 2014.50Bateman and Piggott, “Australia’s MandatoryRetirement Saving Policy.” 51See www.australiansuper.com/resources.ashx/formsandpublications/408/File/93064DC27AE22A50D3D2CF4C56A8AC9F/Accessing_your_super_Nov07R.pdf52The Age Pension is set at 25 percent ofaverage earnings and benefits are tax-free. Clare,Ross, “Retirement Savings Update” Associationof Superannuation Funds of Australia, (Sydney:2008).


53Calculated as 100 minus the ratio of thepension Gini index to the earnings Gini index.OECD, “Pensions at a Glance.” 54Bateman and Piggott, “Australia’s MandatoryRetirement Saving Policy.” 55Harding and Kelly, “Funding the Retirementof Baby Boomers.” 56Alembakis, “Super System Needs Reform forFuture.” 57Changed to 2 percent effective April 1, 2009.58This changed in April 2009.59New Zealand Retirement Commission,“Review of Retirement Income Policy” (2007).60Kritzer, Barbara E., “KiwiSaver: NewZealand’s New Subsidized Retirement SavingsPlans,” Social Security Bulletin 67(4), (2007).61The government elected in November 2008froze the required employer match at 2 percentof income.62Retirement Commission (2007).63Kritzer (2007).64http://www.ird.govt.nz/news-updates/like-to-know-april-2009-kiwisaver-changes.html 65See www.treasury.govt.nz/publications/informationreleases/kiwisaver/background/ks-assumptions-note.pdf.66See www.kiwisaver.govt.nz/media/ks-media-mr-2008-03-25.html.67Gibson, John and Trinh Le, “How Much NewSaving will KiwiSaver Produce,” University ofWaikato New Zealand Working Paper 03/08(2008). Estimates that each dollar of KiwiSaverassets represents only $0.09 – $0.19 of newsaving. They show that homeowners are 45–88percent less likely to fund KiwiSavercontributions with reduced spending than arerenters with otherwise similar characteristics.Similar results are seen in the United States,where contributors without housing assets havehigher fraction of new saving than reshuffledsaving; see D. J. Benjamin, “Does 401(k)Eligibility Increase Saving? Evidence fromPropensity Score Subclassification.” Journal ofPublic Economics 87, no. 5 (2003), pp.1259–90.68These numbers assume 50 percent take-up ofprivate accounts by 2016. A 65 percent take-upwould increase costs over the projection byone-third. Retirement Commission (2007).

69See www.fundsource.co.nz/FindAFund.asp?uta=zu011&sShow=25&sort=8.70See www.sorted.org.nz/.71OECD, “Pensions at a Glance.”72Trinh Le, Grant M. Scobie, and John Gibson,“The Accumulation of Retirement Wealth:Evidence for New Zealand,” paper presented atthe Fifteenth Colloquium of SuperannuationResearchers (University of South Wales, 2007). 73Retirement Commission (2007). 74Le, Scobie, and Gibson, “The Accumulation ofRetirement Wealth.” 75National Insurance contributions are roughlysimilar to U.S. Social Security payroll taxes. In2009, employees pay 11 percent on earningsbetween 90 and 770 pounds per week and 1percent on amounts above 770 pounds perweek. 76The approximate annual value of the basicpension in March 2009 was $6,540 forindividuals and $10,630 for couples.77Gemma Tetlow, “Pension Policy in the UK:Recent Developments,” PowerPointpresentation (London: Institute for FiscalStudies, December 8, 2008);www.ifs.org.uk/docs/pel08_tetlow.ppt#259,1,Pensions Policy in the UK: Recent developments.78OECD, “Pensions at a Glance.” 79U.K. Department for Work and Pensions(DWP), “A Detailed Guide to State Pensionsfor Advisers and Others” (London: 2008).80For details, see www.scottishlife.co.uk/scotlife/Web/Site/Adviser/TechnicalCentralArea/InformationGuidance/General/TheStateSecondPensionExplainedPage.asp.81Nearly 65 percent of workers were enrolled intheir employer’s plan in 1979. DWP, “Securityin Retirement: Towards a New Pensions System:Summary.” (May, 2006).82An individual can have more than onestakeholder pension83This amount and the upper-limit amount willbe indexed to average earnings.84These rates will be phased in over three yearsbeginning in 2012. The 1 percent governmentcontribution comes from all employeecontributions to personal accounts being tax-free.DWP, “Personal Accounts: A New Way toSave: Summary,” (2006).



85Respondents were asked to rate how likelythey were to stay in or opt out of theiremployers plan. Twenty-four percent said theywould definitely stay in and 45 percent said theywould probably stay in. Only 11 percent saidthey would definitely opt out. DWP, “PersonalAccounts: A New Way to Save: Summary,”(2006). 86DWP, “Personal Accounts: A New Way to Save.”87Department for Work and Pensions, “Chapter2: Making it Easier and More Attractive toSave,” in “Pensions Bill – Impact Assessment,”(2008).88Data from BMRB International, reported inDepartment for Work and Pensions, “Chapter2: Making it Easier and More Attractive toSave,” in “Pensions Bill – Impact Assessment,”(2008).89Estimates from the Pension Policy Institute inLondon show that returns in personal accountswith low costs could be up to 5.9 percent, 2percentage points higher than in stakeholderaccounts. Pensions Policy Institute, “WrittenEvidence on the Pensions Bill 2007-8,” PPIReport, (London: 2007). 90Pensions Commission (UK), “A New PensionSettlement for the Twenty-first Century:Executive Summary” (London, 2004).91OECD, “Pensions at a Glance” 92Individuals who are at the mean of earnings in2007–¬08. DWP, “A Detailed Guide to StatePensions for Advisers and Others,” (2008),Office of National Statistics, “Chapter 12:Household Pensions Resources,” in “PensionTrends.” (2008).http://www.statistics.gov.uk/cci/nugget.asp?id=2044. 93HM Treasury, “The Annuities Market”(London: 2006). 94Bank of Scotland Annuity Service, “PensionAnnuity Search Service” (Edinburgh: 2007).95Insolvency occurs when revenues are belowoutlays. 96Congressional Budget Office, “Updated Long-Term Projections for Social Security” (August2008). This prediction has improved from 2016since 2001. Under the alternative fiscal scenario,in which tax provisions scheduled to sunset in2010 do not expire, revenues are lower thanunder the baseline.

97Rajnes, David, “An Evolving Pension System:Defined Benefit and Defined ContributionPlans,” Issue Brief, Employee Benefit ResearchInstitute (Washington: 2002). The reforms in2001 increased limits on contributions toqualifying 401(k) and IRA plans, increased thedeductibility of employer contributions to plans,and enabled IRA participants to choosewhether to treat contributions as traditional orRoth IRA contributions. 98AARP, Retirement Security of Insecurity? TheExperience of Workers Aged 45 and Older”(Washington: AARP, 2008). 99Employee Benefit Research Institute, “”TheU.S. Retirement Income System” (Washington:2005). The Revenue Act of 1978 establisheddeferred compensation 401(k) plans. 100William G. Gale, J. Mark Iwry, and Peter R.Orszag, “The Automatic 401(k): A simple Wayto Strengthen Retirement Savings.” Policy Brief2005-1 (Washington: Retirement SecurityProject, 2005). 101Brigitte C. Madrian and Dennis F. Shea, “ThePower of Suggestion: Inertia in 401(k)Participation and Savings Behavior,” QuarterlyJournal of Economics 116, no. 4 (2001), pp.1149–86.102Bureau of Labor Statistics, “NationalCompensation Survey: Employee Benefits inPrivate Industry in the United States, March2003” (U.S. Labor Department, 2006). 103See http://www.tsp.gov/rates/tsp-expense-ratio.pdf.104Gale, William G., J. Mark Iwry, David C.John, and Lina Walker, “IncreasingAnnuitization in 401(k) Plans with AutomaticTrial Income,” (The Retirement SecurityProject, Policy Brief No. 2008-02).

The views in this paper are thoseof the authors alone and shouldnot be attributed to the BrookingsInstitution, Georgetown University’sPublic Policy Institute, The PewCharitable Trusts, or any otherinstitutions with which the authorsand the Retirement SecurityProject are affiliated.

Copyright © 2009 GeorgetownUniversity. All rights reserved.

The authors thank CatherineLee, RSP's former ResearchAssociate, for her extensive workin beginning this chapter.

David C. John isPrincipal to TheRetirement SecurityProject and a SeniorResearch Fellow withthe Thomas A. RoeInstitute for EconomicPolicy Studies at TheHeritage Foundation.

Ruth Levine is aResearch Assistant atthe BrookingsInstitution.


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