Australia’s Not-So-Super Retirement System
American Social Security reformers see a lot to like, but there are some aspects they shouldn’t seek to copy. Many of us in the UK came to this conclusion some time ago!
Americans recently learned that Social Security’s Old-Age and Survivors Insurance Trust Fund reserves will run out in 2032. Left unaddressed, this will translate into a 22% reduction in benefits for the nearly 73 million Americans who will be over 65 by 2030.
U.S. policymakers are scanning the globe, looking for solutions. President Trump thinks Australia’s superannuation system has something to teach us. “It’s really worked out very well,” Mr. Trump says. Is that true?
Pioneered in the 1980s and 1990s by free-market-friendly Labor governments, “super,” as Australians call it, shifts much of the burden of funding pensions from the state to the private sector.
A core feature of Australian superannuation is a legal requirement that employers contribute 12% of an eligible employee’s annual earnings to privately managed super funds. Employees can also make direct payments into their superannuation accounts up to a certain amount. These arrangements are accompanied by a means-tested government age pension to help retirees whose superannuation isn’t sufficient to make ends meet.
One positive lesson of “super” is that pension systems in which the private sector plays an ever-growing role can help address the threat of insolvency confronting U.S. Social Security.
In Australia, about 35% of retired men and 23% of retired women rely on superannuation benefits as their primary retirement resource. By 2050, half of all Australian retirees will be self-funded. This helps explain why Australian government pension expenditures are projected to decline from 2.6% of gross domestic product today to 2.1% by 2060. By contrast, average government spending on pensions in the OECD nations is predicted to rise from 9% to 10.4% of GDP.
Other features of the Australian system, however, should give Social Security reformers pause.
First, in the name of protecting future beneficiaries, Australia’s super funds are subject to heavy regulation with high levels of administrative, auditing and governance compliance. Less wary of government than the average American, many Australians find extensive regulatory oversight of those managing a large portion of their future retirement income to be reassuring.
This translates into significant regulatory costs, most of which are passed on to those invested in super funds in the form of high fees. The effect is to reduce the size of future retirement payments.
Australia’s Productivity Commission forecast in 2018 that higher-than-average fees would cost the typical employee who retired at 67 about 12% of his superannuation. A 2024 Vanguard analysis underscored that while most Australians saw superannuation as crucial to their retirement, they were unaware of how much super funds were charging.
Another difficulty facing the Australian system concerns accountability: specifically, the limited ability of super fund members to hold managers responsible for mediocre results.
Shareholders in U.S. and Australian publicly traded companies can challenge poorly performing management through shareholder meetings and via activist investors who increase shareholder value by ousting directors and executives. Few opportunities for such bottom-up accountability exist in the Australian superannuation system. That can breed complacency among fund directors and CEOs.
In Australia the accountability problem is exacerbated by unions’ sway over a particular type of super fund. Known as industry super funds, these were originally set up by employers and unions to steward the savings of workers in the 1970s and 1980s. In 2025, ISFs controlled more than 40% of Australian superannuation assets.
Under Australian law, employers and unions appoint directors to ISF trustee boards under what is called the equal representation model. Union leaders say this ensures that workers have some indirect influence over decisions made by ISF boards and managers.
That claim is difficult to square with trends in union membership. The proportion of Australian employees who belong to unions fell from 51% in 1976 to 13.1% in 2024. Unions long ago lost the authority to serve as legitimate proxies for Australian workers.
Union officials, however, remain hard-wired into the governance structures of ISFs. That creates internal pressures for these funds to invest in industries with high union membership. It also helps explain why so many former Labor Party politicians have been appointed to senior positions in ISFs. The number of former Labor ministers serving in such capacities has been widely noted, as has the Labor government’s resistance to diluting employee representative requirements.
I have little doubt that union-friendly American legislators, among them some Republicans, would try to replicate similar arrangements in an Australian-style reform of U.S. pensions. The result would be the same as it is in Australia: the proliferation of opportunities for union officials and ex-politicians to use their oversight positions to promote political agendas at the expense of retirees.
Given the looming crisis confronting Social Security, U.S. policymakers must consider how other countries have addressed similar issues. We can learn as much from the Australian model’s deficiencies as its successes. That system doesn’t work as well as Mr. Trump supposes, and ignoring its weaknesses would be a serious error.
Mr. Gregg is president of the American Institute for Economic Research.
Joint union/corporate management of retirement plans worked so well in the United States that Congress just spent $90+ Billion US to bail them out – with legislation THAT DOES NOT SOLVE THE DELIBERATE, INTENTIONAL, ALL BUT FRAUDULENT UNDERFUNDING.
Why do I use terms like “deliberate”, “intentional” and “all but fraudulent”?
It is obvious from our history.
The seminal law signed by President Ford in 1974, the Employee Retirement Income Security Act, introduced federal government insurance for pensions under ERISA – through something called the Pension Benefit Guarantee Corporation.
However, the funding requirements were so lax that union (multiemployer) and single employer pensions were consistently underfunded – relative to their liabilities.
Accounting changes and certain legislative changes, especially one in 2006, responded to the chronic underfunding of single employer pensions, and since then, we have seen active participation (workers currently accruing a benefit) decline from 30+MM in 1980 to < 11MM in 2023 (probably less than 10MM today).
How long ago did we know of the “deliberate”, “intentional” and “all but fraudulent” underfunding in multiemployer/union plans? Well, certainly by 1980, 46 years ago, when President Carter signed into law the Multiemployer Pension Plan Amendment Act of 1980. 1980!
When the 2006 changes took effect, most single employers either exited their DB pensions (frozen or terminated), or severely curtailed accruals with prospective changes.
How about those union/management plans? They did nothing, because the 2006 legislation allowed underfunding to continue.
Eight years later, the funding issues became so acute that Congress enacted the Multiemployer Pension Reform Act of 2014 (MPRA; P.L. 113-235) to address the projected increase in plan insolvencies and to provide options – however, most plans dragged their feet in making changes because options required reductions in pension benefits.
Then President Biden, signed into law a multiemployer pension bailout as part of the American Rescue Plan Act (ARPA) of 2021. It established the Special Financial Assistance (SFA) program to rescue failing union pension plans – authorizing $97 Billion in direct, non-repayable grants to solvent and failing plans, those with very low funding percentages or those who previously cut benefits under the 2014 reform law.
While the legislation guesses that $97 billion will allow multiemployer pensions to cover full benefit payments and prevent reductions through at least 2051, expect the funds to run out long before then … so, years from now, we may have to do it all over again.
With respect to Social Security funding, I assert the two best solutions would include one that is honest and transparent and another that is politically savvy and opaque.
Honest and Transparent
– Congress confirms they promised more than they were willing to tax – failing to properly fund and ensure the benefits were sustainable.
– Each American (including those entering the workforce for the first time in 2026) would receive confirmation of what they must pay or should have paid in taxes (to make Social Security sustainable in the current year, and in the future (an intergenerationally savvy solution) – 1, 2, 3, 5, 10, 15, 20, 25, 50, and 75 years into the future, as well as indefinitely (lives in being)) compared to what they would pay (12.4% total today) or what they actually paid in taxes in the past – the “Gap”,
– Each American (including those receiving benefits) would be provided options (the 12.4% rate, plus a surcharge or 12.4% rate plus a reduction in benefits, or a combination), actuarially priced (including a load for antiselection, without impacting the progressive benefit formula), that would, over time, make the system sustainable. The default would be increased taxes. No one could elect to reduce benefits below the applicable federal poverty level (1 Person: $15,960 annual ($1,330 monthly), 2 People: $21,640 annual ($1,803 monthly))
– Each subsequent year, Americans would receive another notice on the progress that has been made, and the options would be repriced as appropriate.
– Social Security benefits (formula, other provisions) would be frozen, such that Congress could not make prospective changes to improve or reduce benefits, so that the program would effectively transition from an entitlement (that Congress could change or eliminate at any time) to an intergenerational quasi-contract.
Politically savvy and opaque:
– No action until September 2028, once the Democrat and Republican nominees to succeed Trump are known, and the candidates for Congress starting in January 2029 are known,
– No final federal budget action for the budget year starting October 1, 2028, only a continuing resolution that funds the federal government through November 15, 2028,
– Trump announces, with the threat of a presidential veto, that he will save Social Security, by approving budget legislation after the 2028 elections, where that legislation includes the following changes effective January 1, 2030:
– Increase the FICA tax for 2030 and future years from 12.4% to 17.4%, reevaluate this rate every five years,
– Change the allocation from 6.2% from workers 6.2% employers, to 6.2% from workers, 11.2% employers,
– Cap the Social Security wage base for 2030 and future years at $100,000 (for taxes and benefits), until indexation of the Social Security Administration’s National Average Wage Index (AWI) reaches $100,000 ($69,846.57 in 2024),
– Recalculate and reduce Social Security benefits for those already receiving benefits whose benefits were calculated including years with income in excess of $100,000, capping income at $100,000 for all years prior to 2030.
– For excess reserves (defined as monies in excess of those needed to fund benefits in the current year), change investments from federal debt financing to more traditional pension investment allocations (equities, bonds, capital preservation, real assets, etc.)
The 11.2% employer tax is a stone’s throw from the Australian system (if Trump really likes it for some reason) – but not as costly to employers because of the $100,000 cap on the wage base.
All Republicans and Democrats would love to avoid blame for increased taxation – dumping it on Trump.
Trump will love awarding himself “Savior of Social Security” honors.
When it comes to investments in real assets, perhaps Trump’s successor can reinvigorate prior proposals to purchase Greenland. In case you did not know, America has been interested in acquiring Greenland in the past – all the way back to Andrew Johnson in 1867, Howard Taft in 1910, Dwight Eisenhower in 1955, and Trump in 2026.
Republicans would appreciate the $100,000 cap, which returns Social Security (benefits AND taxes) to something closer to the initial design for a base level of income replacement.
Democrats would appreciate the fact that the only folks who suffered a cut in benefits are higher income beneficiaries, AND, that the added 5% a year in taxes are shouldered by employers.
However, even rookie economists know that, sooner or later, the incidence of increased taxes paid by employers will have the impact of reducing the Total Rewards received by an employee while they are employed (to fund the promised benefits in retirement).
Which do you like? Which do you think America should pursue? Or, do you have a better alternative?
Happy to discuss, debate.