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Australians Do It with Compulsion
By Stephanie Flanders, BBC News
October 13, 2004
Australians have about 9% of their salary withheld for pension saving.
Paul Keating brought in compulsory saving in 1992.
As hints are dropped in the UK that we may be forced to save for a pension, Australians are already 12 years down the compulsion road.
And they don't seem to mind it at all.
It was a Labor Prime Minister, Paul Keating, who brought in compulsory pension saving - the Republican whom the Sun once dubbed "the lizard of Oz".
Since 1992 all employers in Australia have to contribute to a private pension for their workers, calculated as a percentage of their employees' salary.
Market 'transformed'
That share was 3% to begin with, but it has gradually risen to 9%.
As in the UK, Australian trade unions were the big proponents of the policy and employers were against.
But these days, everyone seems to think compulsion was a good idea - not just for the country's retirees but also for its financial system.
Forced pension saving has certainly transformed the Australian pension market.
In the mid-80s, about 40% of Australians had a private pension.
Now more than 90% do - compared to about 65% of full-time workers in the UK.
About half of Australian private pensions are run by employers or trade unions, but the rest are retail funds similar to the ones we have in the UK (though minus the mis-selling and other scandals).
Some of those new pensions represent saving that would have happened anyway.
Extra saving
But studies have found that at least 60% is genuine extra saving by workers, who would otherwise have spent that 9% that's being taken off their wage packet each year.
As a result, household net saving as a share of GDP is about 2% higher than it would have been, without compulsion. Although, as in the UK, the saving rate is still pretty low.
The interesting thing about all this forced saving is that it's difficult to find anyone who thinks it a hardship - still less a tax.
In fact, the only debate here is about whether people should be made to save even more.
But that, in itself, should probably be a reality check for those thinking that compulsion is the magic solution to the pensions crisis facing other aging rich economies like the UK.
Australia has had compulsion for 12 years - and there is still a widespread belief that Australian baby boomers are not saving nearly enough for their old age.
As things stand, even with compulsion, most Australians retiring in 20 years' time will still qualify for the state pension, which is somewhat more generous than in the UK but, unlike ours, entirely means-tested.
Paul Keating reckons that the system will have to be in place for 40 years before most people are going to get enough savings out of it to retire on a decent private income.
'Neat trick'
Though most people in Australia now have a private pension, they are much less well-funded than the average private pension in the UK.
There is another reason why other countries may not jump to follow Australia's lead in pensions.
Keating was able to introduce the scheme, in large part, because the trade unions had already negotiated similar schemes, on an industry level, covering about 60% of workers.
And they were able to do that because Australia was enjoying an unprecedented period of economic growth - close to 4% a year, on average, from the mid-1980s onwards.
This meant that workers were still able to get rising take-home pay, despite the fact that more of their total income being put into a pension.
Equally, employers could afford to pay the larger total pay bill, because productivity continued to increase. And no-one considered it to be a tax.
You're left thinking: it's a neat trick, if you can pull it off. Whether less fortunate countries - and governments - would find it so easy is another question.
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