Summary
Highlights
The hosts introduce a listener-requested episode comparing the US and Australian retirement systems. They clarify that the discussion will focus on investment-related accounts, excluding government pensions like Australia's age pension and US Social Security. The Australian system will serve as a baseline for comparison, given the presumed familiarity of the listeners.
Australia's superannuation system has a compulsory aspect, where employers contribute a percentage of an employee's salary. In contrast, the US system has no compulsory retirement savings; it's up to individuals. Incentives in the US include tax breaks and employer matches on 401(k) contributions. The 401(k) was introduced in 1978, while Australia's compulsory super came in 1992. Many small businesses in the US do not offer 401(k) plans due to administrative costs. A significant portion of self-employed Australians have zero in super, but the situation is more severe in the US, with half of all Americans having no retirement savings. Both hosts agree on the benefits of compulsory superannuation for ensuring widespread retirement dignity.
In Australia, super contributions are taxed at 15%. The US has two main types of retirement accounts: 'regular' and 'Roth'. Regular accounts (like a regular 401(k) or IRA) have no tax on contributions, offering a tax-free entry for money. Roth accounts (Roth 401(k) or Roth IRA) require full tax payment on contributions (after-tax money).
For Australian super, capital gains and income earned during the accumulation phase are taxed at 15%. A long-term capital gains discount reduces this to 10% if an asset is held for over 12 months. In the US, money within a retirement account (both regular and Roth) is not subject to taxes on capital gains or income during the accumulation phase.
In Australia, assets in pension mode (after retirement, up to a certain cap, currently $2 million) have no taxes on capital gains, income, or withdrawals. In the US, regular retirement accounts have no tax on income and capital gains in retirement, but withdrawals are taxed as regular income at the individual's marginal tax rate. A Required Minimum Distribution (RMD) rules apply from age 73 for these accounts. For Roth accounts, because contributions were already taxed, there are no taxes on withdrawals, and no RMDs, meaning the money can remain in the account indefinitely. The proposed tax on super balances over $3 million in Australia has no direct equivalent in the US currently, though some worry about future taxation on large Roth balances.
US tax policies generally mean taxes have no impact on how one invests within a retirement account. In Australia, even with lower super tax rates, tax efficiency (e.g., minimizing short-term capital gains) and considering after-tax returns are important due to the 15% accumulation tax.
In the US, 401(k) plans are employer-selected, and employees typically have to use the chosen provider, which can limit investment options and potentially lead to higher fees. Individual Retirement Accounts (IRAs), on the other hand, allow individuals to choose their broker and invest in a wide range of assets. Money from 401(k)s can be rolled over into IRAs upon leaving an employer. Australia offers more choice, allowing individuals to select their own super fund, not just the employer's default, and options include self-managed super funds (SMSFs) or pre-mixed options.
Australian super funds charge admin and investment management fees. A large fund like Australian Super charges around 0.69% annually, while the industry average for MySuper options is 1%. In the US, IRAs can have zero admin fees and free trades, with fees only for specific funds or ETFs. Large company 401(k) plans can have fees as low as 0.27%, but small business plans can be as high as 1.26%. The hosts express that Australian mega super funds should have lower fees, especially the fixed admin fees, and that regulatory changes in Australia contribute to administrative burdens and higher costs for super funds, including SMSFs.
The US system offers significant choice, leading to both excellent and poor options. Roth IRAs, with no future taxes or withdrawal requirements, are seen as an ideal retirement account. However, the lack of compulsory savings leads to a high percentage of Americans with no retirement funds, partly due to individuals cashing out 401(k)s when changing jobs and incurring penalties. While the US system can be superior for individuals with the means and discipline to save, the Australian system is deemed better for overall retirement outcomes for the general population, making it the 'winner' in terms of broader societal benefit. Improvements in Australian super could include lower fees and greater member engagement and financial literacy.