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Americans are afraid of retirement. Barely half of working-age Americans believe that Social Security will provide them with the same benefits that retirees receive today. More than two-thirds of Americans worry that workers cannot save enough on their own to ensure a secure retirement. After nearly four decades of inaction to close the social security financing gap, which now stands at $20 trillion, policymakers should look to our other English-speaking countries for inspiration.
These nations, with political and economic traditions similar to ours, offer valuable lessons in developing sustainable retirement programs and building adequate retirement incomes.
Countries around the world face the same demographic challenges related to aging populations. Low birth rates and longer lifespans are straining the finances of government pension programs in almost all developed countries.
Political progressives sometimes look to continental Europe for political inspiration. In some of these countries, retirement benefits provided by social security-like programs account for the vast majority of total retiree income. In Luxembourg, for example, government benefits replace 89% of a typical worker’s pre-retirement earnings, well above the 70% “replacement rate” that financial planners consider sufficient for retirees to maintain their level of income. previous life.
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But, frankly speaking, most Americans don’t care how things are in Luxembourg. Or France, or Germany, or Belgium, or most other continental European countries. The traditions and roles of these nations in government are different from those that most Americans consider appropriate for their own country.
But there is a class of countries that are much more like the United States, including the United Kingdom, Australia, New Zealand, and Canada. Not only because of their linguistic commonalities, these Anglo-Saxon countries are familiar to Americans in the way they construct the general relationship between citizens, government, and the economy.
But when it comes to pension benefits, other English-speaking countries are taking a different route than the United States. Even as American progressives argue for the expansion of social security benefits, most other Anglo-Saxon countries argue for a more limited role for government-provided benefits while taking more steps to increase people’s personal savings. households for retirement.
The major English-speaking countries all offer a stronger retirement income safety net than the United States. Australia pays a means-tested benefit set approximately at the US poverty line, effectively eliminating poverty among the elderly. New Zealand offers a universal, fixed, dollar-based retirement benefit without a means test. The UK also offers a flat-rate pension benefit, but the benefit is graded according to the number of years the pensioners have worked. And Canada offers two minimum retirement benefits, one based on years of residence in the country and the other based on need.
While these Anglo-Saxon countries pay higher minimum pension benefits than the United States, they also pay significantly less to higher-income retirees. In 2022, the maximum Social Security benefit was $41,206, paid to someone who earned an average of about $130,000 a year over their career. This compares to $11,456 a year in New Zealand, $13,150 in Australia, $11,608 in Canada and just $11,141 in the UK. Retirement benefits for high earners are simply much more generous in the United States than in other English-speaking countries, forcing the federal budget to pay benefits to households that can easily afford to save for retirement on their own.
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But differences in government pension programs only tell half the story. With the exception of Canada, all English-speaking countries are also doing more to encourage retirement savings in addition to their government benefits. In Australia, every employee must be enrolled in a pension scheme, to which employers must contribute 10.5% of employees’ earnings. In the UK and New Zealand, employees are automatically enrolled in Supplementary Retirement Accounts which include a matching employer contribution, although employees can opt out if they wish. Canada does not yet require or allow employees to participate in private savings plans.
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The US Social Security program, under which a high-income couple could retire with more than $80,000 in annual benefits, is an exception in the English-speaking world. Social security-type programs in other English-speaking countries focus more on preventing poverty among the elderly, while encouraging more strongly private retirement savings to supplement these basic benefits. There’s no reason the United States shouldn’t follow the lead of these other countries in providing stronger retirement security at a lower cost to the taxpayer.
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