Trump Likes Australia’s Retirement System. Why It Would Be a ‘Tough Sell’ in the U.S.

President Donald Trump recently highlighted Australia’s approach to retirement. (James Bugg/Bloomberg)

Key Points

• President Trump expressed interest in Australia’s retirement system, which mandates employers contribute 12% of employee income to private ‘super’ accounts.
• Australia’s system reduces government’s role in retirement funding, contrasting with the U.S. Social Security’s 12.4% payroll tax-funded trust.
• The U.S. Social Security fund faces depletion by 2033, potentially leading to a 23% benefit cut without congressional intervention.

President Donald Trump gave Australia’s retirement system a shout out this week, but it would take a heavy lift to reform Social Security with a similar approach.

At a news conference on Tuesday about the new “Trump accounts” for children, the president was asked if there were any other policies his administration was considering. Trump responded that his administration was looking “very seriously” at the Australian retirement plan.

“It’s a good plan,” Trump said. “It’s worked out very well.”

He didn’t elaborate how the U.S. might adopt Australia’s approach, which began in the early 1990s. It requires employers to contribute 12% of their employees’ pretax income into a “super” account that is managed by private funds and invested in the market. Underpinning the super accounts is a government pension that goes to retirees who meet certain income and asset criteria. The number of retirees receiving the government pension is expected to shrink over time as the super system matures.

By contrast, Social Security is funded by a 12.4% payroll tax that’s split evenly between employee and employer. This revenue flows into the Social Security trust fund, which is invested entirely in U.S. Treasury securities that offer a lower rate of return than stocks over time. There have been proposals over the years to allow the trust fund to invest in stocks, but they haven’t gained serious traction.

Australia’s system has drawn wide praise for reducing the government’s role in funding its citizens’ retirement—and the attendant fiscal strain of that in an aging society—while still providing a robust system.

“Australia has solved its retirement problem through their superannuation funds,” Jay Clayton, U.S. attorney for the Southern District of New York and former Securities and Exchange Commissions chair, said at a conference Tuesday hosted by the publication Semafor. “It’s amazing.”

The U.S., however, isn’t collecting enough in payroll taxes currently to cover full benefits for current Social Security recipients, and the trust fund is making up the difference between what’s collected and what’s paid out to beneficiaries.

Barring congressional action, the Social Security retirement fund is set to run dry in 2033. Most observers expect lawmakers to come up with a fix before that, but if they don’t, then retirees will face an automatic benefit cut of 23%, according to the most recent projections.

Any changes to Social Security would have to go through Congress, and Australia’s system would likely be a “tough sell” for a country that generally rejects private-sector mandates, says Richard Jackson, president of the Global Aging Institute.

Australia requires that employers fund private accounts for their employees, and it requires that employees participate. In the U.S., employers aren’t required to provide retirement accounts for their workers, and workers who have access to a 401(k) plan are allowed to opt out of it.

Perhaps one way to introduce such a concept in the U.S. would be with a lower required employer contribution of around 3%, Jackson says. Australia started out around that level and then gradually increased it over the years.

Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com