Across the world, personal savings is becoming an increasingly important source of retirement income. The aging demographic, economic globalization, and longer life spans are driving policy changes in the United States and abroad. Many countries have reduced their pay-as-you-go public pensions as their populations age. Private employers continue to move away from traditional defined-benefit pensions to shed costs and financial risks in order to compete globally. Meanwhile, growing life spans mean more years of retirement that must be funded through savings.
Public policies play a critical role in ensuring that people have a secure and comfortable retirement. Absent mandating that workers save for retirement, research shows that the key to increasing saving is to make it easy and automatic. Workers provided with a payroll deduction retirement savings plan have far more retirement assets than do workers without such a plan. Further, automatically enrolling workers into a plan, instead of requiring them to opt in, substantially raises participation rates and enables people to start saving earlier than they would otherwise.
AARP has long supported policies and mechanisms that make saving easier and more rewarding. In the United States today, the most innovative policy changes are occurring at the state level. Individual states have begun to adopt policies to increase the retirement savings of their private-industry workers. These states are taking slightly different approaches toward this goal. The results of this unique experiment could lead to insights for future policy.
For an international perspective on this effort, this edition of The Journal highlights programs that are increasing retirement savings in three countries—Australia, New Zealand, and the United Kingdom—and in three states that have recently adopted similar reforms or are likely to do so soon. Jeremy Cooper describes Australia’s compulsory retirement savings system but notes that the compulsion ends at retirement, with no requirement to convert the savings into a lifetime income stream (annuity). Susan St John discusses how New Zealand’s KiwiSaver fits into that country’s overall retirement income framework. Helen Dean shares the “quiet pension revolution” that the United Kingdom has undergone in recent years under its automatic enrollment reforms, while Nigel Keohane writes about that country’s decision to move away from requiring most retirees to convert their savings into an annuity. Romain Despalins and Stéphanie Payet offer insight into the challenges low interest rates present for pensions.
State senators from California, Illinois, and Washington describe their states’ recent experiences with helping small business employees build more secure retirements. Kevin de León of California describes why the most populous state in the country needs a retirement saving system similar to that in the United Kingdom. Daniel Biss of Illinois shares lessons from retirement systems abroad that were incorporated into his state’s recently passed law establishing an automatic enrollment payroll deduction retirement account system for companies that do not offer any type of retirement plan. Mark Mullet of Washington State discusses why his state passed legislation establishing a marketplace for small business retirement plans.
Encouraging people to save for retirement—an event often decades into the future—in any country is a tall order. The right policies, however, can make a difference in people’s lives, and while each nation and state has specific circumstances, we can learn a lot from each other.
About the author
Gary Koenig is vice president of financial security in the AARP Public Policy Institute (PPI) and leads the AARP strategy on savings and financial planning. In PPI, he manages a team of economists and policy experts working on economic, finance, and consumer issues. His own work focuses on Social Security, retirement savings, and income adequacy in retirement.