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In a book he has just co-authored on America’s burgeoning defined contribution retirement system, DON EZRA finds plenty of inspiration to be drawn from Australia’s example. However, the co-chair of global consulting at Russell Investments also finds three big areas for improvement. Australia has the most advanced defined contribution (DC) superannuation system in the world. No other country with developed capital markets has such a high ratio of DC assets to GDP.

You have done many good things with the superannuation system, in fact, the rest of the world draws lessons from you. Inevitably, however, superannuation also has room for improvement. I want to discuss three aspects here: first, the parts of the system that have no right or wrong approach; second, the things that have been done well; and third, the opportunities for further improvement, three in particular. I’ll draw on arguments from a recent book of which I’m a co-author. Some fundamental decisions about retirement aren’t right or wrong, they’re just political choices.

How should responsibility be shared between the state, employers and individuals? Different countries have different philosophies. How much is compulsion and how much is voluntary? Should there be a further state safety net? And so on. Even the normal retirement age is a political decision. When Bismarck instituted the first state pension in 1889, the starting age was 70 – and the average life expectancy was 45. So he clearly didn’t expect many to collect the pension, and even those who collected wouldn’t have been expected to collect it for long.

If you want to support an active lifestyle in a retirement that starts earlier and lasts longer, then it’ll cost a lot more. It’s not right or wrong, it’s a choice. What Australia did very well was to recognise that simply saving isn’t enough. Investing those savings makes a huge difference: on average, every dollar saved generates roughly ten dollars to spend in retirement, given the Australian willingness to take some risk via investing in growth assets. In America, by contrast, until recently most DC investments were in low-interest deposits, which supports a much more frugal lifestyle.

That was fine when DC was a side-show and workers relied much more on defined benefits for super. But now that DC has moved to the centre of the super stage in America, it’s inadequate. So the standard American default option now invokes risk too. In fact, that’s an area where Australia should now play catch-up. Your typical participant holds roughly 70 per cent in growth-oriented investments (like equities) and 30 per cent in relatively safer fixed interest. That’s fine for the average risk exposure over a lifetime.

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