Monday, February 24, 2014

Canadian pension system outshines U.S. one

While the amount of risk borne by employees varies across the retirement income models of Canada, Australia and the Netherlands, risks are pooled among workers or offset by employers and the government to a greater extent than in the U.S., according to a research paper called “Lessons for Private Sector Retirement Security from Australia, Canada, and the Netherlands.” The paper is authored by John A. Turner, director of the Pension Policy Center, and Nari Rhee, manager of research for the National Institute on Retirement Security.
The research of Turner and Rhee shows that in none of these three countries does the average employee alone absorb all of the funding, investment and longevity risks in order to reach, with the help of government assistance, a basic standard of living. By contrast, in the U.S., nearly all of these risks are borne by the individual, rendering the majority of the country’s employees woefully underprepared for their golden years.
“Americans are struggling to save for retirement,” says Rhee. “The typical family has only a few thousand dollars saved.”
The research also finds that—compared to the U.S.—Canada, Australia and the Netherlands offer greater economic security in retirement through higher income for low- and mid-wage workers provided by government assistance and universal or quasi-universal employer-sponsored retirement plans.
In Australia and the Netherlands, universal or quasi-universal employer-sponsored programs provide a significant supplement to government retirement income.
The paper suggests that, while all countries are unique, the U.S. could borrow elements from the pension programs of Australia, the Netherlands and Canada.
Australia’s universal workplace retirement system is a DC system in which employees are individually responsible for investment risks. “However, the success of the system is based largely on nearly universal coverage and high mandatory employer contributions, which are now a gross 9% of pay and will rise incrementally to a gross 12% of pay in 2019,” the study notes. Australia is also setting standards for things such as fee disclosure and financial advice.
The Netherlands
Funded primarily by employers, the Dutch pension model provides some of the highest income replacement rates among wealthy nations. Employers are shifting market and longevity risks toward employees, but employees absorb those risks as a group and intergenerationally—not as individuals. Employers are passing on the risk to workers through the increased use of hybrid workplace retirement plans, called Collective Defined Contribution Plans. These are DC plans from an employer’s perspective but hybrid DB plans from the employees’ perspective.
Canada has a voluntary employer-sponsored retirement benefit system with lower coverage than the Australian and Dutch models. However, it also has a two-part government income system that replaces more than 70% of lifetime average wage-indexed earnings for low-income employees and about 50% for median-income workers, the study says. In Canada and the Netherlands, employee contributions to both DB and DC plans are tax-deductible.

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