Guest post by Joe Hoft
In 1935 US President Franklin D. Roosevelt (FDR) signed into law the Social Security Act. The law created a social insurance program designed to pay retired workers age 65 or older a continuing income after retirement. Progressive politicians love this program and talk about its virtues, some real and others made up, like they did about Fannie Mae and Freddie Mac, the two social programs that ultimately led to the 2008 worldwide financial collapse. As explained in my new book Falling Eagle – Rising Tigers, Australia has a program in place to assist their citizens in their old age too, which has many advantages over the US Social Security system.
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Over recent years the demographics that made the US Social Security program affordable have reversed and today the program is crashing. Estimates were that in order to break even, US Social Security needed at least 2.9 workers to pay taxes for each retiree who receives benefits. The current ratio has been near this and dropping because the baby boomers produced fewer children than their parents did and now the baby boomers are nearing retirement.
There are many criticisms of Social Security. It is an archaic program which some call a “Ponzi scheme” and therefore fraudulent. Funds have not been set aside or invested by the federal government to offset the future promises. This would be illegal if it were done in the private sector. These promises are estimated to be more than $20 trillion. The maximum amount of taxes to fund the program has exceeded original maximums promised by politicians. If calculated, the returns the government provides on the taxes paid by individuals for their retirement incomes through Social Security are dismal. And now over the next 20 years, 10,000 individuals in the US will retire every day.
Australia’s superannuation program may be the answer to the US’s Social Security quagmire. Australia implemented an innovative retirement system based primarily on mandatory private savings in plans called ‘superannuation funds’. This system became known as the ‘Superannuation Guarantee’ and has since been modified and expanded over time.
Australia’s superannuation is a mandatory retirement savings scheme for employees. It mandates that employers contribute 9% of eligible employee earnings, similar to FICA taxes in the US Social Security program, into a fund owned by the employee. The worker cannot generally access the superannuation funds until retirement or disability. There are very few governmental restrictions on the funds as well as governmental investment asset requirements and the beneficiary selects who will oversee their funds and what investments will make up their own portfolios.
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In addition to fund performance, the superannuation funds may add disability or life cover to the plans they manage. These benefits provide the individual additional coverage should an unfortunate event occur and have created a very large market for these types of insurance products for not just insurance companies but reinsurers as well. The incentive for individuals to obtain insurance coverage also benefits the country by having fewer individuals to care for under its welfare and disability programs. The Australia Superannuation Guarantee is an example of how a sensible and smart social program in a country can have a positive impact on other social programs in that country.
Overall the results of the Australia superannuation program to the Australian economy are positively staggering. The Australian markets are liquid and growing. Results from a global pension assets study produced by Towers Watson & Company in early 2013 noted that the Australia pension fund assets are the fourth largest in the world – not so bad for a country of a little over 20 million people. It is clear that the Australian superannuation scheme ‘works effectively’ while the US Social Security system does not.
For more information on how the US would greatly benefit by replacing Social Security with a superannuation scheme get my book Falling Eagle – Rising Tigers.
See www.joehoft.com for information about the author and how to order your own copy of Falling Eagle – Rising Tigers.