Australia is not only the home of the koala, the kangaroo, and the duck-billed platypus, but may also be home to that other rare and exotic animal: the secure retirement.
What does Australia have that America lacks? For starters, its retirees enjoy more financial security, better tax laws, and a generally higher standard of living than we do on this side of the globe. That’s thanks to a few key differences in government policy — and some twists and turns the country has taken in the course of history.
As an American who has just moved to Australia for a long assignment — and, maybe decades hence, a comfortable place to retire — I’ve had a chance to look into what’s behind the great retirement divide.
The Bull Market Down Under
The Australian shares market (aka, its stock market) has been on a massive bull run for roughly the last 100 years. In fact, according to data compiled by Credit Suisse, between 1900 and 2009, the Australian shares market was the best-performing market in the entire world.
More recently, over the past 30 years, Australian shares have returned on average 11 per cent per year. Returns like that can certainly create some sizable nest eggs.
Of course, with the global financial crisis in 2008 and 2009, portfolios shrank on both sides of the Pacific. But Australia was spared two of the most devastating economic blows from that crisis — specifically, a huge housing crash and a surge in unemployment.
In Australia, home prices didn’t dive like ours, and there was no mass wave of foreclosures. That can be traced largely to a few local factors: Australia’s desert geography holds major development to the coasts, so the great waves of suburban sprawl that fed housing booms — and busts — elsewhere never happened there. (Whereas, for example, North America’s Sonoran Desert can support a massive, ever-growing metropolis like Phoenix, most of Australia’s arid Outback simply couldn’t.) Local regulation has also kept the Aussie housing supply from expanding too rapidly. And even for those who found themselves in trouble, Australia’s banks are far more inclined, by law as well as by disposition, to do short sales rather than foreclosures. But fewer Aussies got into mortgage trouble: By and large, Australia’s lenders never jumped on the sub-prime bandwagon either.
Meanwhile, unemployment there never rose above 6 per cent. The heart of Australia’s economy lies in its massive resource deposits, and thanks to nearby China’s hunger to buy them, the global financial crisis never really became local news Down Under.
A “Super” System
Another thing that Aussies needn’t fret as much about is the state of their future financial security.
In the U.S., those near retirement age are worried about the “security” in Social Security, and many people well below retirement age wonder if it will even exist by the time they reach their golden years. Australians long ago tackled the key issues we face now — issues of government liabilities, private employment, and retirement savings.
Some 20 years ago, foreseeing the ageing of the population and the untenable strain this would put on its pension system, the Australian government instituted a retirement savings policy known as “superannuation.” This requires employers to pay 9 per cent of each employee’s salary — above and beyond each employee’s take-home pay — into a savings account. (Employer contributions are set to rise to 12 per cent by 2020.)
Accounts are invested, either at the discretion of the employee (i.e., a “self-managed super fund”) or placed into a larger fund pool and managed by investment professionals.
Employees can contribute additional money if they wish. Accounts are taxed annually, but upon retirement, funds can be withdrawn free of tax — a setup similar to our Roth IRAs.
The superannuation system was meant to gradually replace the government pension program, with privatization less the aim than simply the outcome. Today, those nearing retirement in Australia have balances averaging in the $210,000 range for men and $100,000 range for women. This compares to an average 401(k) balance of $143,300 for American citizens in their 50s, according to Fidelity Investments.
The system is still young, however. No group of Australian workers has yet spent their entire careers within the superannuation system, and balances should one day be far higher for workers nearing retirement age. And retirees may also still receive income from the government in the form of that frankly named “old age pension,” which is means- and income-tested for those whose super-funds don’t cover the full costs of their retirements, who suffered investment losses, or who weren’t employed long enough. This is Australia’s rough equivalent to Social Security.
According to a 2013 HSBC survey, “the average Australian currently expects 30 per cent of their retirement income will come from the pension,” in comparison to American retirees, who expect to receive about 38 per cent of their income from Social Security.
More Taxing Problems
Outside of these retirement plans, Australians who invest enjoy better tax treatment than Americans who buy similar types of stocks.
Dividends, for example, are a common source of income for retirees in the U.S. and Australia. But a key difference in Australian tax law means Australians often receive more generous amounts.
In the U.S., corporations pay taxes on their profits, and have the option of paying out a portion of these profits to shareholders in the form of dividends. Shareholders then are required to pay taxes on those dividends they receive, typically at a rate of around 15 per cent.
Not so in Australia, where companies are allowed to pay taxes on profits and then pass on the tax benefits to shareholders, eliminating the “double taxation” of the U.S. (The government effectively gives investors back the tax the company pays, then taxes the investor on the lot, a kind of “look-through taxation” in which the investor just pays the difference between what the company paid and what he or she owes.) Correspondingly, in part, dividend yields tend to be high Down Under, with yields in the 8 per cent or 9 per cent range not uncommon.
So should the U.S. go the way of the Aussies?
Of course, this summary of the Australian and American systems is both rough and oversimplified. It would take hundreds of pages, maybe a dissertation or two, to detail the differences and similarities. But a few basics are worth pointing out: Australian taxes are higher than U.S. taxes, but salaries are much higher, too — the minimum wage is nearly $16 an hour. There’s good universal health care, and child care is heavily subsidized for working parents, among other things. Bill Bryson has called it the Norway of the South Pacific.
Still, the direct comparison raises intriguing points. Could the U.S. benefit from examining and possibly adopting some Australian financial policies? Share your thoughts in the comments section below.
This story was originally published by DailyFinance.
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