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Is Retirement Saving In The US Really Any Different? (part 2)

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Lester Wills

Last time I outlined the problem with retirement savings in the US and mentioned the changes that have been implemented with the enactment of the 2006 Pension Protection Act. I also suggested that not only do I think my knowledge and expertise will translate I also intimated that Australian Financial Planners may have experience that US Planners will need. In this edition I outline why:

Similarities with Australia

The Australian and US approaches to retirement saving have much in common, both now and in the past. Until the late 1980's Australia had a voluntary system that relied upon employees making personal contributions to a retirement savings fund. Employers could supplement this with additional contributions. As a result the system became an incentive by which employers could attract and retain selected employees and was backed up by a means tested government aged pension for those with little or no retirement savings or other assets. However, the approach had many gaps, especially among the ranks of the low paid and part time workers.

That is very much where the US systems was prior to the introduction of the PPA reforms.

In 1983 legislation took effect to change the tax status of retirement savings and in 1986 compulsory saving was introduced with employers granting a pay increase based on improved productivity in the form of a retirement savings contribution of 3%. Over a number of years this contribution rate was raised to its current level of 9%. Coverage of the workforce increased dramatically from just over 40% of the workforce in 1987 to approximately 90% by 2001.

Following the enactment of the PPA, the US 401(k) DC system is not dissimilar to the DC system currently operating in Australia as cab be illustrated:

Consequently, as a result of the changes brought about by the PPA, the two systems are not radically different. The question is, will the reforms work? To answer that it would be helpful to examine the Australian experience, which I will do next time.


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