Is it realistic to expect that workers can save 12% to 15% of their earnings? McKinnon points to the Australian system, which facilitates individual retirement savings through a mandatory employer contribution called the Superannuation Guarantee, which was introduced in the early 1990s. Currently, this savings rate is 11% of workers’ earnings and is scheduled to rise to 12% in 2025.
The policy has catalyzed broader plan coverage, from around 40% of workers in Australia in the 1980s to more than 90% today; higher levels of retirement wealth; and lower government pension spending. “The results are impressive,” McKinnon said. “Whether you agree with a compulsory retirement savings [plan] or not, the results in Australia suggest the power of features that could help overcome investor inertia, such as autoenrollment and autoescalation.”
Actual savings rates and patterns in the U.S. underscore the challenge and highlight the significant opportunity for policymakers and plan sponsors to promote increased access to retirement plans and capital markets, especially for lower- and middle-income workers, and to double down on good plan design to help all workers become and stay invested.
Clarke believes that behavioral interventions tied to workplace plans as outlined in Vanguard’s How America Saves are having a big impact on encouraging workers to save more for retirement and invest these savings in an age-appropriate asset allocation. More can be done on the policy front and by employers to strengthen retirement savings as workers switch from job to job and sometimes don’t have access to a retirement plan.
“We realize that these recommendations, particularly the one to save 12%-15% of income, may be difficult if not impossible for the lowest income workers,” he said. “But the adoption by plans of best practices such as autoenrollment, autoescalation, and defaulting participants into a TDF are helping to narrow the gap at all income levels and better prepare workers for a secure retirement.”