30 August 2016
Judith Sloan Contributing Economics Editor
There are two classes of citizens: public servants and pollies, and the rest of us.
It was always going to come out that the real rorts and costs in the superannuation system are the public sector defined benefit superannuation schemes.
Just ignore Scott Morrison’s assurances that “commensurate measures” will ensure the privileged ones on defined benefit schemes will be treated like everyone else; it’s complete twaddle and he knows it.
Or he should know it, unless he has been hoodwinked by his bureaucratic advisers who are, almost to a man and a woman, beneficiaries of these gold-plated schemes.
Let us first consider constitutionally protected employees. They include judges, tribunal members and senior state public servants. As their titles suggest, they won’t be affected at all by the changes to the taxation and regulation of superannuation announced in the budget.
When Peter Costello introduced his superannuation surcharge tax, a group of judges simply went to court — presided over by another group of judges — to ensure the tax didn’t apply to them. Surprise, surprise, they won.
So for the select group of constitutionally protected employees, life is unaffected and they can look forward to their lavish pensions in due course. No “commensurate measures” for this lot.
For others who are members of (untaxed) defined benefit schemes, at worse there may be an imposition of a few grand of extra taxes for those earning more than $100,000 a year in retirement. But this impost comes nowhere near making the treatment of these pampered pooches equivalent to people who have had to work hard and save to accumulate their superannuation balances.
There are a variety of defined benefit schemes for public sector workers. Many of them are closed but some continue to this day.
The generosity of these schemes varies. Defined benefit schemes used to operate in the private sector for high-paid executives , but they have been closed for more than 20 years. Note also that few of the private defined benefit schemes paid retirement pensions: beneficiaries were handed a multiple of their final salary and sent on their way.
Top of the pops of the public sector schemes is the old parliamentary scheme, with ex-pollies earning up to 75 per cent of their highest salary indexed by movements in parliamentary salaries. Before 2001, a 30-year-old retiring (or defeated) politician could qualify for a pension — think Natasha Stott Despoja and Bill O’Chee — defying the rule about accessing superannuation only on reaching preservation age.
The scheme was completely closed in 2004. And note that neither Malcolm Turnbull nor the Treasurer are members of this old scheme. But they do take advantage of an employer contribution of 15.4 per cent, whereas those in the private sector have to make do with 9.5 per cent. You know it makes sense.
There are also some generous parliamentary schemes at the state level. And the schemes covering judges and magistrates are to die for — although if you do die, your spouse or partner will get about two-thirds of your indexed pension for the rest of their lives.
Consider the old Commonwealth Superannuation Scheme for federal public servants that was closed in 1990. (Another defined benefit scheme was put in place, the Public Sector Superannuation Scheme, to replace the CSS. The PSS was closed only in 2005.)
Most of our fearless policy advisers will be members of the CSS. For long-serving employees, the CSS pays out over 50 per cent of final adjusted salary, indexed by the consumer price index. Under this scheme, members could make zero contribution, although contributions up to 5 per cent after tax were permitted to boost final retirement income.
The fact salaries of senior public servants have soared in recent years turns the CSS into a truly princely arrangement.
There is an additional wrinkle to the scheme that knocks it out of the ballpark.
When the system of compulsory superannuation was first introduced, members of the CSS were awarded an additional contribution of 3 per cent of salary to be deposited into an accumulation account. From that point, CSS members could salary sacrifice additional contributions to this accumulation account, free of any of the constraints that apply to workers in the private sector. (This wrinkle also applies to members of other public sector defined benefit schemes.)
What this has meant is that the entire concessional contributions cap has been available to these lucky ones because there is no estimate of the monetary value of the notional annual contribution made on their behalf.
So a current CSS member aged 58, say, can make a $35,000 pretax annual superannuation contribution , whereas an employee in the private sector must take into account the employer contribution when calculating the amount that can be salary-sacrificed as a concessional contribution .
It is a complete disgrace, but the practice has persisted for years and years — I guess because the public servants never bothered to advise the politicians to close the loophole .
But if you really want to smell the putrid stench of hypocrisy, consider the government’s decision to grandfather these schemes. When the CSS was closed to new members, all existing members were allowed to remain within the old scheme and to continue to enjoy all its benefits. Ditto the parliamentarian scheme.
It was not as if there wasn’t an alternative. CSS members could have been transferred to a less generous accumulation scheme, with only their CSS benefits to that point preserved. But the government of the day decided against this action. The same argument applied to the parliamentarian scheme.
So here’s the real rub: grandfathering is fine for public servants and parliamentarians, according to politicians. But when it comes to mere mortals seeking to save for their retirement, grandfathering is so yesterday.
Indeed, it is not just the case that grandfathering is out of fashion ; there is a need to look back into time to make sure that members of accumulation schemes have not contributed too much of their post-tax savings. Indeed, Revenue and Financial Services Minister Kelly O’Dwyer told me that she wanted to reach further back than July 1, 2007, but the integrity of the records couldn’t be assured. She was fearful there could be two classes of citizens without this retrospectivity.
Kelly, there are two classes of citizens, but it has nothing to do with backdating regulation. There are the privileged public servants and pollies and the rest of us.
And the cost of running these defined benefit schemes is soaring as interest rates fall — in much the same way that $1.6 million doesn’t generate the income it once did.
The total superannuation liability of the commonwealth (for its present and former employees) will rise by close to $19 billion across the budget forward estimates , culminating in a total figure of $195bn in 2019-20 .
Any budget savings made as a result of the government’s budget superannuation changes are completely swamped by the burgeoning liabilities associated with the defined benefit schemes.
It’s time to return to the drawing board.
To mere mortals seeking to save for their retirement, grandfathering is so yesterday.