Social Security in decline: What the U.S. can learn from New Zealand's KiwiSaver program

This week's Social Security trustees' report contains rather dire projections, showing permanent and growing cash-flow deficits and impending trust fund exhaustion. This report on the program's financial decline should motivate discussion in Washington and across the country on what a better system might look like.

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A good question to start with: What if workers controlled more of their retirement savings and the federal government less?

The AARP and the Brookings Institution recently teamed up for an event on New Zealand's auto-saving plan: the KiwiSaver program. New Zealand ranks among the top five countries in the Heritage Foundation's Index of Economic Freedom, far ahead of the U.S., which was ranked 12th in the latest edition.

In 2007, the island country to the east of Australia adopted a nationwide, auto-enrollment, voluntary savings plan to enable more New Zealanders to save for their own retirement.

A payroll-based savings system in which employers auto-enroll their employees unless they opt out, KiwiSaver combines several key features of U.S. private retirement savings accounts to enable more workers to build their own nest egg for retirement.

Savings are directed to defined-contribution fund providers, similar to 401(k) or IRA providers in the U.S. Participants may choose their own providers or are moved into the employer-chosen fund. Employers may choose a provider for their employees or are randomly assigned to a default fund.

KiwiSaver seeks to supplement the tax-financed retirement system, New Zealand Superannuation (NZS), which provides a flat benefit to all eligible Kiwis upon reaching age 65. The program is considered an initial success; seven years into its existence, about half of the eligible population participates, and over 70 percent of those between the ages of 18 to 24.

Generous subsidies, like a $1,000 kick-start payment (in New Zealand dollars; about $855 in U.S. dollars) and a 50 percent match-up to an annual contribution of about $1,043 NZD are expensive for New Zealand's budget, despite surpluses. However, these are not a necessary component of an auto-enrollment saving plan, and would be fiscally irresponsible in the current U.S. context.

A similar proposal has received consideration in the U.S. The "automatic IRA" would extend payroll-based savings to many millions of Americans who do not currently have access to a retirement savings plan at their employers. President Obama includes the proposal in his budget, and a bill was introduced in the 112th Congress.

Like KiwiSaver, U.S. employers who do not currently offer a retirement plan for their workers would auto-enroll their employees in an IRA, unless the employee opted out. Employers' administrative responsibilities would be minimal and offset with a tax credit, and the very smallest employers would be exempt.

A 2013 U.S. Government Accountability Office study reported that lower-earning households would benefit the most from the proposal. While efforts at the federal level have lost traction thus far, several states are either considering or are implementing their own version of an auto IRA. States should exercise care to preserve participant choice and encourage provider competition.

Not all is lost on the federal level either, though. Most recently, Sen. Marco Rubio (R-Fla.) voiced concern that millions of American workers lack access to payroll-based retirement savings while members of Congress and federal workers benefit from the public employee Thrift Savings Plan (TSP). This does not mean that all Americans should participate in the TSP, a proposal that carries its own risks, but it opens the door to considering alternatives that extend the benefits of payroll-based savings to more Americans.

In its 2011 plan to balance the budget (Saving the American Dream), the Heritage Foundation laid out a new vision for greater retirement security in America. Social Security would provide robust insurance against poverty in retirement with a predictable, flat benefit financed from general tax revenue, and workers would control more of their own retirement savings through the private retirement savings system, including the auto IRA.

These and other reforms would strengthen Social Security's promise to protect against poverty in old age while protecting working generations from opportunity-crushing tax increases — and enable Americans to control more of their own retirement savings.

Boccia is the Grover M. Hermann Fellow in Federal Budgetary Affairs in the Roe Institute for Economic Policy Studies at the Heritage Foundation.

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