Culture Matters: Retirement Thinking US-, Australia and Eurozone-style

Today we are here with John Mitchem and Jorik Van Zanden. We're going to talk about one thing only: what are the cultural differences around retirement thinking in the Eurozone, Australia, and the US. With a dollop of what that means for retirement outcomes.

Let’s jump in!

I’ll kick us off with the Eurozone. What the heck is going on in France right now and why.

Jorik Van Zanden: Yes, in France the retirement age has always been a sensitive issue, and considered a right for many. In the midst of democratic changes and changing economic realities, Macron has reignited the plan to increase the retirement age and reform the retirement system. You might remember this was in part the reason for the Gilets Jaunes (Yellow Vests or Jackets) protests taking Paris to ashes a few years back.

This reform is necessary, and I think everyone knows it’s necessary, because approximately 15% of France’s GDP goes toward state pensions. That, in combination with an aging society and the burden of healthcare, is absolutely unaffordable. But that does not mean it’s easy to change. And it doesn’t mean it’s a popular decision to do so.

Many French people regard their pension as a right, something they've worked for their entire life. Any interference is seen as a hefty impairment of their accrued rights.

John, you were in France during the Yellowjacket protests.

John Mitchem: Yes, I was there. So we're talking about the culture of retirement. You know,  culture influences how you feel about retirement, and the retirement funding experience you have informs the culture.

In the case of the Gilets Jaunes in 2018 and the current protests, it’s about much more than what year you retire. In continental Europe, pensions are considered a right. They were hard-negotiated many decades ago, and people do not want to give up their rights in any culture in any country.

The pension age situation in Paris today is very symbolic and emblematic of how the French feel about themselves, their role in France, and the role of France in the world. It's big.

How bad is it to work an extra two years?

Jorik: It may not appear to be much of a loss, two years from age 62 to 64. But that's also highly dependent on what kind of economy you have.

We had a similar shift in the Netherlands going from age 65 to 67, which I think had one version of a Yellowjackets demonstration, which the news covered and everyone laughed about a little bit, because how bad is it to work an extra two years. But that's very easy for a country which is also the market leader in part time work, and extremely service oriented. Working from a desk for two more years is something entirely different than working in heavier labor types of jobs, which France has a lot more of than the Netherlands.

So those two years in combination with very high unemployment among the elderly is a different thing.

For some, having to work an extra two years might be fine, but having to be unemployed for another two years without the possibility of taking a pension is another story. That is a very long time and very fundamental to the mental and financial health of a whole society.

John: France is super highly developed and highly educated, with a very tightly governed core in Paris that runs the country. And there's a disconnect between the super educated bureaucrats that run the French economy and run the French government and the rest of the country. So the country is not very dynamic, doesn't really evolve very easily. They don't really like to try new things and do things a different way.

Everyone in France from the Ministry of Finance to the union workers in the street understand the basic arithmetic of what Jorik was talking about: an aging population, and a super high pay-as-you-go unfunded pension.

France, Germany, Italy, and Spain are the core of Europe. That's the third largest economic group in the world, after the US and China. And they have funded pensions in single digits as a percent of GDP, 5% to 8% of GDP.

By contrast, the Netherlands has funded pensions at 210% of GDP. Australia, the United States, Canada have 150% of GDP and rising.

They don't even have funded pensions in France. So they haven't even begun to have the real conversation. They're arguing about, I hate to use the cliche, but they're arguing about the deck chairs on the Titanic. The pay-as-you-go system is unsustainable demographically, and arithmetically. There's no argument. They know this. But they haven't even begun the process of funding their pensions, where Netherlands did it 50 years ago.

Jorik: Many of these issues go back to just before Second World War, where, for example, Germany chose the Bismarckian model, which basically aims to protect against relative poverty. It assumes that the more you earn during your lifetime influences on how much you need after retirement.

Other countries like Netherlands and the UK chose the Beveridge model, which focus on absolute poverty protection. If you look at the UK, it's extremely sustainable, because it's very low state-paid pensions, and very high occupational pensions, the same as the Netherlands. This is how, culturally speaking, these systems grew up. And now you reap the results. It's simply more sustainable.

But it's extremely difficult to rewind 80-90 years of social welfare policy, even though the “hammer of destruction” of the demographics is going to hit hard.

John: As if things weren’t complicated enough, the pension “conversation” in France extends far beyond pensions.  As with any pay-as-you-so system (including US Social Security), the program is funded by raising taxes from current workers and transferring the money upstairs to current retirees.

In an era of declining fertility and increasing longevity, the dependency ratio (roughly the number of current retirees to current workers) is rising around the world.  In the EU today some 35% of the population is over 65.  By 2050, this will be over 50%.

Crises make great political tools. Gentlemen, let's hop over to Australia and talk about their model.

John: Australia is a country with pensions funding at 150% of GDP and a universal, mandatory participation, funded defined contribution retirement system. Every worker in Australia has a superannuation account, which is in contrast to the US where only 55% of people have a 401(k) type of account, and in Europe where no one has a similar retirement account.

Jorik: That's interesting, John. In Europe, retirement planning is done differently, and it's not considered an endowment, but rather an income. The funds are often pooled, so people share longevity risk.

I just spent three days virtually attending the annual meeting of the Association of Superannuation Funds of Australia, ASFA. It was controversial at first. It was perceived as a tax. It was perceived as something that people wouldn’t want to engage in, because you’re taking money out of their paychecks. But now it's extremely popular. We've had a generation and a half of Super now, and people feel very positively about it.

I detected a tone at the ASFA conference – We are Super and Super is us. Australians see Super as a defining aspect of their identity and they are proud of it.

To round out my education in, I listened to some retail superannuation podcasts. Not policy people, but real people planning their lives. There's a real spirit of engagement and positive feeling about their retirement prospects, and about the fact that they earned these assets, they own these assets. A lot of Australians die with a very substantial balance in superannuation, they are looking forward to passing those assets to their children and grandchildren as a legacy endowment.

That doesn't happen in Northern Europe. They have well-funded pensions, but that kind of legacy endowment doesn't take place because those funds are recycled back into the fund for future retirees. So there's no actual asset ownership.

There's an interesting conversation about the future of Super -- as there is a conversation about the future of pensions in France. But the conversation in Super is not about what we're getting and what we're owed. It's more about what “we could do”.  

Super leadership is saying, we've got this pool of money, we're passing a lot of it to our grandchildren. Maybe we could be using more of this during our lives for housing, for healthcare, for education.

Maybe we could be using the investment of superannuation assets to make our country healthier economically. What about infrastructure? What about the energy trade post carbon energy transition? What about economic development in our Aboriginal communities? The conversation around Super is creative.

And the conversation around pay-as-you-go pensions in France is not creative. It's antagonistic, and frankly, it's fearful. Whereas the conversation in Australia feels optimistic.

Jorik: What's really unique about the Australian system is that there is a real spirit of engagement and positive feeling about retirement prospects. People own these assets, and there's an interesting conversation about the future of super. The conversation is creative and focused on using these assets during people's lives for housing, healthcare, education, infrastructure, and energy transition.

John, we love what you're saying. You and I are both based in the US. Jorik is based in Europe. Do you think we can ever have these sort of characteristics in the US?

John: It's possible. We're getting there with the rise of Auto IRA programs, parallel to the 401(k). In a generation, we could extend workplace savings coverage from 55% to maybe 75%. (Massena’s head explodes because she wants it faster).

It takes time to change things in the pension world. You’ve got to think in decades, not years. We also have funding shortfalls in Social Security so we have elements of the pay-as-you-go shortfall, as in Europe, but we also have elements of the possibilities of what we could do with our funded assets as in Australia.

Jorik: As a European looking into the US, I think a model like Australia's would be very beneficial but would also require an M -- mandate -- and a T, tax. Another option could be something like the UK's auto-enrollment system, which obliges employers to offer retirement savings plans or access to their employees, with automatic enrollment. This gives individuals some choices while harnessing the benefits of behavioral finance.

John: I would support the mandate-to-offer paradigm that we're talking about. Interestingly, most of my Australian friends think that if superannuation were put forward today as a law obliging a mandatory 10% of wages for all workers with no opt out, it probably wouldn't pass Parliament. So it may prove to be that Australia is going to be one of the few countries in the world that have a mandatory defined contribution saving system. and all the rest will be some form of auto enrollment, mandate-to-offer formulation the way we have in the UK with Master Trusts and NEST, and in the United States with 401(k)s and Auto IRAs.

Jorik: It has been super interesting to talk about what may appear to be a lot of differences, but are actually a lot of similarities. Because the underlying issues are the same.

Vision. And how does this intersect with your effort at Jasper Forum?

Jorik: What we've picked up at the Jasper Forum over the last two years is that there's so much to learn from one another. I'm a lawyer and John is a journalist. We’re also learning from our friends in public policy positions and academia. We find it is extremely valuable to integrate the experiences from different places on Earth, and see that, hey, actually, we're all working on the same issues. We're working on the same problems, so what can we learn from one another. What doesn’t work, so that we can avoid it.

We cannot implement the Dutch system into the US system by tomorrow, regrettably. Developing these best practices here will take some time.

John: I really noticed that the inputs are transnational. Global aging -- in terms of its systemic impact on every corner of the world, global aging is right up there with global climate change. There's no escaping it.

So demographic aging is a universal factor, as are the interest rate environment and global economic growth. Those are transnational because they move between continents instantaneously. So the inputs are similar, and it's the outputs that are varied.

And those are the ones where culture really manifests.

There’s more collectivism and collective spirit in the Nordics, in my opinion. There's a collective government mandate in France, In the Nordics I perceive that there’s an emotional connection. With collectivism in France, I see a different emotion: it's just the way that it is and I want my share.

And in the United States and Australia, these are younger nations with immigrant populations, more dynamic kind of capitalist economies. We're a bit more at the cowboy end of the spectrum. We'd like to work and earn and be independent from our government. France is the exact opposite: I want from my government what I am owed. It's a very different.

For those who aren’t (yet) involved, what is the Jasper Forum?

John: Jasper Forum is a discussion group of practitioners, academics, policymakers and friends from all over the world. We just do defined contribution. We're not trying to solve the whole pension world. We're not trying to solve global aging. All we're talking about is the construction of these systems and how these tools can work, and the lessons we can learn from the variations we see between these systems around the world.

You can find us on LinkedIn and on Twitter. Our Twitter feed is fantastic.

Very valuable, very important efforts. There's a lot to be learned. Thank you John Mitchem and Jorik Van Zanden both for taking time to share your expertise today. We appreciate it!

Want more? You can connect directly by email: John Mitchem and Jorik Van Zanden, and as we share immediately above.

John Mitchem, Principal of JM3 Projects, has worked in journalism, public policy and the financial industry. After two decades with the United Nations and the State Street Corporation, he founded JM3 Projects to provide strategy development and thought leadership projects for financial firms, consultancies, trade associations and NGOs. John collaborated with Bob Reynolds and the team from Great West/Empower/Putnam on the book “From Here to Security: How Workplace Savings Can Keep America’s Promise” (McGraw-Hill Professional).

Jorik van Zanden is a consultant at AF Advisors in Rotterdam and researcher at Utrecht University. Jorik worked at the European Parliament as a legislative aid to Sophie in ’t Veld where he worked on the Pan-European Pension Product legislation. After his time in Brussels, he moved to Fidelity International as a pension and public policy specialist and was involved in setting up FILs pan-European pension solution. In addition to working on his PhD he has consulted with many large financial firms and central banks, mainly on legislative and business development issues. Jorik has published on a variety of pension and retirement issues.

In 2022, John Mitchem and Jorik van Zanden launched Jasper Forum – a discussion group and think tank focused on the development of defined contribution savings systems worldwide.

This piece was featured in the April 6, 2023, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here