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Save for Retirement, or Else

Here in the United States, the controversy over incorporating private accounts into Social Security has caused fierce debate. Those who support private accounts argue that by letting people take a portion of their payroll taxes and invest them in a diversified portfolio that includes stocks and other risky assets, they would earn better returns than Social Security's all-bond trust fund account can provide. Opponents counter by saying that private accounts would merely be a way for the financial-services industry to increase its profits, at the expense of unsophisticated individuals who would be unable to handle the responsibility of investing for their own retirement.

Yet while the Social Security debate in America has been locked in political stalemate for years, other countries have moved forward with similar plans of their own. For instance, Australia instituted retirement-savings provisions that include mandatory private accounts. Although the Australian system isn't without its flaws, it provides an interesting picture of what private accounts might look like for Americans in the coming years.

How Aussies save for retirement
The Australian system is composed of three main parts. First, there's a regular pension that resembles Social Security in many ways. One primary difference, however, is that the pension is means-tested; high-income retirees have their pension payments reduced or even eliminated entirely.

The second component of the Australian retirement system involves a mandatory contribution toward private retirement accounts. Australian employers must contribute 9% of each employee's compensation into a pension fund. The funds are managed collectively but allocated to individual employees in a manner similar to employer-sponsored retirement plans in the United States. In combination with the third aspect of the Australian system -- voluntary savings by individuals -- these accounts try to take some of the burden away from the traditional pension system, which is straining under the weight of changing demographics.

Pros and cons
Just as Americans debate Social Security reform, Australians continue to struggle with the positive and negative effects of their retirement-savings system. According to official projections, the mandatory savings should result in a large increase in retirement income. In addition, while Australian stocks like BHP Billiton (NYSE: BHP  ) and Telstra (NYSE: TLS  ) have performed well lately, the Australian economy has boomed as a result of higher commodity prices. It's unlikely that the move toward individual accounts has much to do with rising share prices.

On the other hand, some Australians fear the financial risk involved with mandatory retirement savings accounts. Although employers administer the accounts, the trend is toward offering employees more flexibility with their accounts, leaving them increasingly vulnerable to lack of financial knowledge and bad investing decisions. In addition, because of the means-tested portion of the program, there are incentives to work less and retire early, spending down savings to increase payouts under the regular pension program.

There are no easy solutions to the retirement savings problem. The Australian program provides a concrete example for the U.S. to observe and perhaps to emulate. In the meantime, though, you need to plan for your own retirement future without government-sponsored private accounts to assist you.

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For more on the role Social Security will play in your retirement plan, take a look at our Rule Your Retirement service. Foolish analyst Robert Brokamp and his team of experts work through the numbers to figure out your best retirement strategy. Take a look at what Rule Your Retirement has to offer with a free 30-day trial.

Fool contributor Dan Caplinger isn't planning to move to Australia even if the retirement benefits are pretty good. He doesn't own shares of the companies discussed in this article. The Fool's disclosure policy is appropriate at any age.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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