In a series of recent articles on firstlinks.com.au, Clime's John Abernethy has repeatedly returned to a favourite target: defined benefit (DB) pensions in the Commonwealth public sector. His commentary often features references to “hidden liabilities”, questionable forecasts, alleged actuarial errors and warnings of a looming fiscal crisis. He has even speculated that the Future Fund might one day be transformed into a repository for distressed mortgages as a way of dealing with supposed shortfalls in its ability to meet DB pension liabilities.
It is a compelling story, but inaccurate. The analysis mischaracterises the nature of defined benefit pensions, misrepresents public finance and actuarial practice, and consistently overstates the fiscal significance of what is in reality a closed and declining set of obligations. The rhetoric also omits important contextual facts about how these schemes operate and who actually receives these pensions.
What follows is an attempt to rebut his arguments.
1. ‘Unfunded’ DB pensions exist because government chose not to pre-fund them
Abernethy often states and implies that the ‘unfunded’ status of Commonwealth DB pensions reflects excessive generosity or impropriety. This misunderstands history. Successive governments decided to pay Commonwealth superannuation benefits directly from consolidated revenue rather than building investment pools. This was a conventional public finance practice throughout the 20th century, in Australia and elsewhere.
The unfunded nature of the liability tells us nothing about the generosity of the benefit itself. Had governments elected to accumulate contributions, the liabilities would now be fully funded. The choice was made by governments, not by public servants, judges, military personnel or politicians, and certainly not by the average Commonwealth Superannuation Scheme (CSS) or Public Sector Superannuation Scheme (PSS) member. Indeed, some state government DB pensions are fully funded, which provides tax benefits to the recipient.
2. Defined benefit pensions are bought through compulsory contributions
There is nothing free or unearned about a CSS or PSS pension. Members have always made compulsory contributions. In the PSS, members could contribute up to 10% of salary from after-tax income. The employer contribution is notionally 15.4% (this is foregone by the employee just like the superannuation contribution made by defined contribution members through the superannuation guarantee). The effective total contribution rate is therefore up to 25.4% of salary. This is greatly in excess of what many accumulation fund members contribute today through a combination of compulsory superannuation guarantee and salary sacrifice. Most public servants today on a defined contribution scheme have the 15.4% employer contribution with no additional contributions. It is unsurprising that a person putting away 25.4% of his or her income for 40 years will end up with a sizeable pension.
In the CSS, compulsory member contributions were mandatory for every year of service. These funds were, quite literally, paid for by the people who earned them.
Furthermore, many DB members did not work many years or did not progress to senior levels. These individuals receive quite modest pensions. For some, their DB pension is low enough to allow partial access to the age pension and the accompanying health concession card. This hardly resembles the picture of “excessive entitlements” that Abernethy paints.
3. Defined benefit pensions are fully taxed, unlike large accumulation pensions
Abernethy repeatedly suggests that DB pensions enjoy unusually favourable tax treatment. This is incorrect. CSS and PSS pensions are assessable income taxed at marginal tax rates, with adjustments for age-related offsets (over 60). By contrast, a retiree with, say, $1.9 million in a defined contribution pension account can draw down income entirely tax-free, and all earnings are tax free. They can take money from the fund and do as they please. The CSS or PSS pensioner may only live a couple of years and then (unless there is a surviving spouse) the government’s payments cease with nothing owing to the estate.
The comparison is stark. A DB pensioner with the taxable benefit pays income tax every year. An accumulation pensioner drawing a pension from the accumulation scheme is tax-free.
If the public debate is to focus on fairness, it is extraordinary that DB pensions attract such scrutiny when accumulation funds of several million dollars attract so little scrutiny despite their complete exemption from income tax in retirement.
4. Defined benefit pensioners cannot receive the age pension unless the DB pension is modest
DB recipients with moderate or high pensions are ineligible for the age pension. There is no double dipping in these cases. Only DB members who receive small pensions arising from short service or lower classifications can qualify for the age pension. These individuals are hardly the affluent elite that Abernethy insinuates.
Meanwhile, wealthy retirees with large accumulation balances often structure their assets to qualify for a part-age pension or the Commonwealth Seniors Health Card. DB pensioners with moderate or high pensions cannot do so.[1]
5. CPI indexation is not a windfall and erodes real income over time
Abernethy highlights CPI indexation as if it creates rapidly escalating pension benefits. This interpretation is wrong. CPI indexation maintains the nominal value of a pension but does not increase real purchasing power. Because DB pensions are taxable, the real after-tax pension falls over time. The pension does not ‘grow’ relative to living standards. It simply avoids inflationary erosion.
Moreover, Abernethy does not mention that the largest defined benefit scheme in Australia is the age pension itself. The age pension has more generous indexation than CSS and PSS since it is benchmarked to wages as well as prices. Correcting the record on indexation therefore undermines his entire argument.
6. Defined benefit members surrender all market returns
A central feature of defined benefit pensions is that the benefit formula is fixed. Members do not participate in market gains. They cannot benefit from sharemarket growth or long-term compounding. They cannot adjust investment strategy. They bear no investment risk but equally forfeit all investment upside.
By contrast, a three-million-dollar accumulation account can compound tax-free over decades. It can grow substantially in real terms and, importantly, can be passed to beneficiaries. DB pensions have no estate value. They expire at the death of the member or surviving spouse. The present value of the pension therefore declines each year as life expectancy shortens.
In the entire Australian superannuation system, defined benefit pensions are the least capable of facilitating intergenerational wealth transfer. Indeed, if a CSS or PSS pensioner who has no partner dies after a couple of years, the Government gets the entire benefit from the short life. There is no estate to pass on.
7. Abernethy misinterprets the valuation of DB liabilities and the Future Fund
Abernethy frequently criticises the Commonwealth Actuary for “mis-forecasting” liabilities. This criticism reflects a misunderstanding of how long-term liabilities are measured. DB liabilities change when discount rates move, when longevity assumptions shift, when inflation changes or when military and judicial schemes evolve. This is normal actuarial practice. Liability revaluation does not mean pensions are ‘out of control’.
Similarly, the Future Fund was never required to take over pension payments immediately. The timetable is flexible and intended to ensure that the Fund accumulates a sufficient buffer. Nothing in the Fund’s behaviour suggests a crisis or scandal. The suggestion that it may become a ‘bad bank’ for distressed mortgages is speculation without policy foundation.
8. Many other defined benefit schemes exist and always have
Abernethy speaks as if Commonwealth CSS and PSS schemes are uniquely problematic. Yet DB arrangements exist across the public and private sectors. They include military superannuation, judicial pensions, political pensions, state public sector schemes and corporate DB schemes such as those historically operated by Qantas and Telstra.
DB pensions are not a strange anomaly. They are a longstanding and legitimate retirement structure that Australia, like most advanced economies, has largely closed to new entrants but continues to honour for existing members. One could argue that Australia would have been better keeping these schemes. But long-term public servants signed up to them and worked for decades to earn the benefits they provide. They are not a gift, or unreasonable, they are part of the salary package that the Government then provided. Nowadays, the real salaries are much higher than for retired public servants, but there is no defined benefit scheme.
Conclusion
Abernethy’s arguments misinterpret history, economics and actuarial practice. Defined benefit pensions are:
- paid for through compulsory contributions
- fully taxed
- closed to new entrants
- declining in real value
- incapable of generating or transferring capital
- modest for many members
- predictable in cost and actuarially managed
Despite repeated attempts to portray DB pensions as a fiscal time-bomb, the evidence shows that they are stable, understood and entirely compatible with Australia’s retirement income system. The real policy concerns around equity and intergenerational wealth lie within the accumulation system, not the defined benefit schemes.
Defined benefit pensions are not the problem they are made out to be, and there is no substantive basis for additional taxation or reform directed at their recipients.
[1] For the 2025 financial year, the income test allows the full pension if income is less than $212 per fortnight and the part pension cuts out at $2444.60 per fortnight (ie: $63,559.60 per annum). The assets test for a single homeowner cuts out at $686,250 (owner-occupied home doesn’t count) and there are different thresholds for couples and non-homeowners. Defined benefit pensions, on a fixed income, cannot escape the income test, whereas there is more scope for defined contribution members to manipulate their affairs to qualify for the age pension and pensioner concession card.
Paul Lindwall is a former senior Australian Treasury official and former Commissioner of the Productivity Commission.