Australians can choose how to invest the money in their retirement accounts.
TORONTO — As the Ontario government moves forward with plans for a new mandatory provincial pension program, Australia’s system of forced individual retirement saving accounts could serve as a model instead of the CPP, finds a Fraser Institute study.
“If Ontario insists on launching a mandatory provincial pension program, despite evidence that it’s unnecessary, Queen’s Park could learn from Australia about how to design a system distinguished by choice and flexibility,” said Charles Lammam, director of fiscal studies at the think-tank and co-author of Lessons for Ontario and Canada from Forced Retirement Saving Mandates in Australia.
The study suggests Australia’s individual retirement saving accounts, which more closely resemble Canada’s RRSPs, offer more choice and flexibility than the collective CPP model.
For example, Australians can choose how to invest the money in their retirement accounts, which are fuelled by mandatory employer contributions (currently 9.5% of eligible earnings), based on their personal preferences and circumstances.
Australians can withdraw funds from their individual accounts prior to retirement, for medical emergencies or during times of financial hardship. And account balances can be fully transferred tax-free to a dependent upon death.
All contributions and earnings in the Australian accounts accrue directly to the individual.
The study also notes Australia’s scheme is a defined contribution plan, meaning the level of retirement benefits is dependent on how investments perform.
Defined benefit plans like the CPP – where beneficiaries receive a specified monthly benefit – are subject to a different set of risks. For example, under-funding of the plan or changes in the rules by the government could lead to increased contribution rates or reduced benefit payments. And the CPP model concentrates investment risk in a single public-sector asset manager, unlike Australia’s individual retirement saving accounts, which spreads the risk among multiple private sector fund managers.