A Correction from Australia

by Neil H. Buchanan

This is a short update to my Dorf on Law post from two days ago (Thursday, August 13, 2015).

Toward the end of that post, I reported that the Australian government had set up what is technically known as a "fully-funded" retirement system, in which workers are required to deposit money into savings/investment accounts, which are then managed by the government without further input from the worker.  As I described it, the Aussie system "essentially gives workers zero control over how their savings are invested in the financial markets.  Imagine a nationwide system in which Social Security payroll taxes go into a single mutual fund, and the best financial managers invest the funds with relatively low management fees.  The evidence indicates that the Aussie system works rather well."

According to an Australian reader, my facts are wrong -- but it turns out that they are wrong in a way that supports my larger point.  Here is the comment (which was actually posted to my Tuesday post, to which the Thursday post was connected):
As an Australian reader of your column, I suggest that some of your comment might benefit from review. First, while it is true that a proportion of each worker's salary is placed into a fund, there is a choice of funds, some of which charge higher fees than others without any apparent higher benefit. So there is not a 'single national fund' so much as a 'single national program'. Moreover, this program allows a worker to choose his investment strategy (high growth, cash and bonds and so on) and leaves his wealth at retirement as an outcome of the decisions he makes about investment options. In other words, the risk lies with the individual. Second, there is no guaranteed pension for Australian residents other than for those who have less than a determined level of wealth (not including the family home). So for many, including me, the only income I have is what I am able to make from my own wealth, and with low % income over the past few years (2 - 3%) a couple needs about $2M in invested capital to have an income of about $60k to $70k/year. Virtually no-one has this level of capital. Finally, this scheme does not take account of longevity 'risk' - that is one outliving one's pension balance. All in all, I'd prefer to put my pension fund into a collective account and have a determined and guaranteed payment. The Australian arrangement may be artful, but it is also uncertain and may be contributing to a very conservation investment profile within Australia that is fettering industrial innovation and economic activity and development."
This is certainly bad news for Australian workers.  And as I noted above, that bad news helps to explain why the U.S. Social Security system is so superior to the alternatives.  We know that our ERISA rules -- as complicated and onerous as they are -- do not actually protect workers from the various pitfalls of putting one's retirement money into private savings.  When Australia's conservative government installed this very neoliberal plan, they essentially adopted a super-ERISA set of protections.  Even so, they still left workers to "manage" their investments, leaving the risk at the individual level.  Moreover, as the Australian commenter notes, a decent retirement is simply not achievable under this plan.

That is not to say that there couldn't be a system of private accounts that is exactly as I described in Thursday's post.  But the real-world example that I provided in the post turns out, sadly, not to live up to that standard, and it instead stands as a cautionary tale for those who imagine that Social Security can be easily mimicked in a system of private accounts.