Super Fund review must include the public service

Business Spectator Columnist, Melbourne

Once again, our senior public servants are manoeuvring inexperienced federal politicians so that the already generous senior public service pension schemes escape the new taxes proposed for those employed on similar salaries in the private sector.

Yet the current review of superannuation provides the nation with a once-in-a-lifetime chance to make the old public service pension scheme more affordable for the nation and assist in equality.

At the bottom of this commentary I will suggest how we can incorporate public service superannuation into the total superannuation review.

And to underline the importance of this action, the unfunded liability of the public service pensions, when measured correctly, is increasing annually by around $6 billion — about the amount that is estimated to be raised via the new private employee superannuation taxes.

In all the media leaks and briefings, no one has focused on this major superannuation crisis in Australia — the old “super-generous” public service scheme — which includes the defence forces and judges. (New public servants are on a different scheme more akin to the private sector.)

Currently I am overseas attending to family obligations, but over the weekend I caught up on the superannuation speculation and was horrified that the commentaries never referred to treating public servants the same way as those who work in the private sector. This is too big an issue for the nation to await my return.

I fear the inexperience of Treasurer Scott Morrison in dealing with the public servants in Treasury is showing up given that no additional superannuation tax and/or benefits review is being considered for highly paid public servants in Canberra and our federal judges. This is a total injustice.

As you all know, Scott Morrison has fallen in love with the idea that private sector superannuation contributions, instead of being tax deductible, will simply reduce tax payable by a 15 per cent amount. On its own, the idea has merit as was explained last week by Alan Kohler.

Current estimates are that it will raise around $5 billion to $6bn. A big deal. Officially, the unfunded liability of the old federal public servants pension scheme including the defence schemes rose by well over $10bn in the most recent three years, but my actuarial advisers say the assumptions are unrealistic and that the real rise was about twice that level — i.e. on an annual basis more than is expected is to be raised from the private sector over a three-year period.

And remember in the public service we are dealing with a fraction of the number of people who are part of private sector superannuation. We are dealing with huge individual benefit costs.

But making the superannuation system fair and providing some equality is not easy. Let’s take long-serving public servants on, say, a $100,000 salary. If their pension was funded privately, it would require a contribution of between 25 and 30 per cent — i.e. their real salary is $125,000 to $130,000. (In the defence forces the pension entitlement is worth around about 35 per cent or $35,000 on a $100,000 salary.)

In the private sector, money is contributed to a fund by the employer and is taxed in the fund. Money is also contributed by the employee and the tax treatment of those payments is under review. In the case of the public servants, no money is actually contributed.

The government of the day is stating that future governments will meet the pension obligations, but there is no suggestion the obligation will not be honoured. What is really blowing out the estimated future costs is the fact that politicians have extended generous benefits to spouses acquired after retirement (A chance for the Coalition to strike on super, October 20).

The current unfunded liability of the old public service pension scheme is said to be $200bn, but that figure is artificially depressed by the unrealistic assumptions that are used. The real unfunded liability is at least twice that.

That’s why if we are going to levy increased taxes on private superannuation we should make sure the public sector employees at least be taxed on the same basis as the private sector.

The new superannuation proposal for private sector employees envisages that instead of gaining a tax deduction for superannuation contributions, you will get a 15 per cent rebate. That means much higher taxes for people on higher tax brackets.

But in the old public service schemes, no money is actually being paid — it’s all on the ‘never never’, although there is some offsetting money in the future fund. A way must be found to achieve equality. There is a precedent to help.

When those in the private sector earn more than $300,000 they are now taxed at a higher rate on their super contributions. When the private sector tax rate on superannuation was lifted for high earners, the then treasurer aimed for equality and declared that public servants earning above $300,000 would be would be effectively loaned money at the bond rate to cover the tax on their theoretical pension fund contribution.

The politicians of the day are to be commended for that action but, as always happens, they were snowed because the assumptions used to determine the theoretical contribution were designed to substantially reduce the real amount. A treasurer looking for equality with the private sector in the current tax increases could use that $300,000 plus precedent.

This is my four-point action plan:

1) Embrace the concept that the review of superannuation must embrace the public sector.

2) Appoint an actuarial firm that has extensive experience in valuing the cost of defined benefit pensions in the private sector — they will have done extensive work for the big life offices and/or Challenger to calculate the real unfunded liability of the legacy public service scheme and how much it is rising per year.

3) With the help of the actuary, devise a system of deferred tax that equates with what is being done in the private sector. The earlier $300,000 precedent will help but we should also not forget that the pensions that come out of the public service scheme are taxed differently to the private sector. They are not tax-free.

4) End the rort that extends pensions to spouses or partners acquired after retirement.

This is a really important test for Scott Morrison.

Original article here

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