Critics of Commonwealth defined benefit schemes have it wrong

So long as baby boomers can share the same life expectancy as gen z

The Author of this article does NOT mention several key things.

Those on Defined Benefits Pensions:
- Bear no Market Risk which can seriously impact Superannuants who must make their own financial decisions and provide for their own income in retirement. Market Risk can have catastrophic impacts from which Superannuants cannot recover. A buffer of excess funds is therefore required to allow for this as Market Risk must be taken.
- Do not suffer the Risk of fraud or impropriety by financial advisers, financial firms, super fund managers etc., as recent examples show.
- Do not have to manage their retirement income when they are old and doddery and losing their marbles. It's hard enough to do it when you have your full capabilities.
- Do not suffer the stress and time requirements of managing their retirement income in an ever more complex and regulated world.
- Do not have to deal with constantly changing Superannuation rules. And now mooted changes to Superannuation are being imposed retrospectively.
- Can open Superannuation funds and double dip. That is, they can have a Defined Benefits Pension and then also open a tax free Super Fund by contributing to Super from after tax income. This double dipping should be capped and in most cases stopped altogether.
- Enjoy what some may call Rorts. For example, contributing additional dollars to their Defined Benefits Pension and receiving a hugely outsized CPI adjusted twice per annum increased guaranteed annual income; marrying a new much younger spouse after they have retired and that new spouse receives a share of their Pension on death - a case where a 71 year old pensioner married a 28 year old comes to mind - that pension could go on for another 70+ years and that new spouse had nothing to do with the aged pensioner's public service years; public servants ensuring that work colleagues near retirement age get several quick promotions so as to ensure a permanent increase in their Defined Benefits Pension etc. etc..

The basic moral point is that Superannuants without Defined Benefits Pensions have a retirement income based on their and their Employer's (which may be one of the same thing in the case of small businesses) contributions plus the returns that their risky investment decisions have made. The Defined Benefits Pensioner gets a Risk free, Stress free, Time free retirement income CPI adjusted twice per annum based on their Final Average Salary - that is, completely devoid of any connection to their actual foregone income or the investment income it has earned. It's just given to them. If you cost this into the salaries paid those public servants who benefit from DBPs you would see that most of those eligible to receive DBPs in retirement are hugely over paid for the jobs that they do.

And that CPI adjusted DBP grows over time so that the DBP recipient is being paid the most in money terms in their last years when their expenditure needs are least. That unspent money then flows to the beneficiaries of that DBPer. And it's been paid for from the public purse!

There is now a huge inequity within the Public Service between those eligible for DBPs and those who are not. For example, 2 trainees joining the Public Service 3 weeks apart - one received a DBP just before the relevant Scheme was closed, the other didn't. They both received the same salary (after Employer Super contributions in the case of the second trainee). If they both have identical careers in the Public Service one will retire on a substantially higher annual retirement income than the other and that public servant's DBP is CPI adjusted as well.

This inequity creates a huge intransigence within the Public Service where those eligible to receive DBPs simply won't move on. And providing they aren't fraudulent they cannot be sacked regardless of their work ethic and productivity. This intransigence is a negative for Australia's good governance and for retaining bright hard working ambitious young things in the Public Service as the positions above them simply don't come up as they would in the Private Sector.

Most of all, many of these schemes are Unfunded. And those public servants who benefit from such schemes are then funded by taxes raised from people working in the Private Sector, many of them small business people who have to provide wholly for their own risky retirement incomes and are now being asked to pay more tax to pay for public servants' guaranteed risk free retirement incomes. This is morally wrong.

The bear has been in charge of the honey pot. And that bear has looked after itself at the expense of all other Australians.

There is great need to have a Royal Commission into every aspect of Defined Benefits Pension Schemes to shine a light on what is actually happening + what can be done to rein in the huge and ever growing costs of such schemes. Special exemptions should exist for schemes of Defence personnel as, unlike most jobs, they are putting their life on the line for their country.

This response mixes legitimate concerns about retirement risk with a series of factual errors and exaggerated claims about defined benefit (DB) pensions.

Risk is not unique to accumulation schemes.
It is true that DB members do not bear market risk. That is not a “rort”; it is the defining feature of a DB contract. But it is simply wrong to imply that accumulation members are forced to bear market risk. A defined contribution (DC) retiree with a lump sum can purchase a lifetime annuity and thereby convert market risk into an income stream with characteristics very similar to a DB pension. Australia has chosen not to encourage annuitisation, but that is a policy choice, not a structural injustice created by DB pensions.

Moreover, DB members bear different risks: they surrender all upside, cannot change investment strategy, cannot access capital, and usually leave no estate. A DC retiree can draw less in bad years, more in good years, retain capital, and pass assets to beneficiaries. These are not asymmetrical arrangements; they are different trade-offs.

DB pensions are not stress-free gifts.
DB pensions are not “just given”. CSS and PSS members made compulsory contributions for every year of service, and those contributions were from after-tax income. Accumulation members typically pay only 15 per cent (or 30 per cent) tax on concessional contributions. DB members pay full marginal tax before a dollar ever enters the scheme, and then pay income tax again on the pension in retirement. That is not a free ride.

Claims of “double dipping” are overstated.
A DB pensioner may also hold an accumulation account, just as any retiree may. That is not double dipping; it reflects the fact that DB pensions are often modest, particularly for those with short service or lower classifications. Additional voluntary saving is neither prohibited nor unethical. DB pensioners with moderate or high pensions are excluded from the age pension and cannot structure assets to qualify for it. Many DC retirees can.

The alleged “rorts” are either mythical or addressed long ago.
Additional contributions do not generate “outsized” benefits; DB formulas are fixed and capped by service and salary definitions. Last-minute promotions have long been constrained by averaging rules. Survivor benefits are a standard feature of pension design worldwide and reflect actuarial pricing, not moral failure. Extreme anecdotes do not describe the system.

Indexation does not create windfalls.
CPI indexation prevents inflation from eroding nominal income. It does not increase real purchasing power. Because DB pensions are taxable, real after-tax income typically falls over time. The claim that DB pensioners are being paid “the most when they need it least” ignores tax, health costs, and longevity risk.

Unfunded does not mean out of control.
The unfunded status of Commonwealth DB schemes reflects historic public finance choices, not runaway costs. These schemes are closed, declining, and actuarially measured. Their costs are predictable and transparent. They are not “ever growing”.

Workforce effects are a management issue, not a pension scandal.
The claim that DB eligibility creates an unsackable, immobile public service confuses employment law, workforce management, and superannuation design. DB schemes have been closed for decades; any cultural effects are residual and diminishing.

On equity.
Yes, two people hired weeks apart can have different retirement outcomes. That is true of every policy transition in superannuation, tax, or industrial relations. It is not evidence of corruption or moral failure. It is the unavoidable consequence of reform.

Finally, calls for a Royal Commission rely on the premise that something is being hidden. It is not. DB pensions are well understood, fully taxed, closed to new entrants, and shrinking. If there is an inequity in Australia’s retirement system, it lies far more in large, tax-free accumulation balances and intergenerational wealth transfer than in DB pensions that die with their recipients.

Strong views are no substitute for accurate analysis. Let's have a Royal Commission into the Bondi terrorist attacks, or the Governments' responses to Covid. But it would be an incredible waste of taxpayers' resources for a Royal Commission into DB pensions.

PS: I would support a policy that encouraged DC members with lump sums to convert them to lifetime indexed pensions

Hi Paul,

I agree with some of your responses to Angus, but would like to counter the following:

“Finally, calls for a Royal Commission rely on the premise that something is being hidden. It is not. DB pensions are well understood, fully taxed, closed to new entrants, and shrinking. If there is an inequity in Australia’s retirement system, it lies far more in large, tax-free accumulation balances and intergenerational wealth transfer than in DB pensions that die with their recipients.”

There is a lot being hidden regarding DB liabilities. Not because it cannot be found in public releases or on various websites or filtered in press releases. It just isn’t presented in one report nor easy to understand.The parliament simply avoids discussing it - why?

A growing ( not shrinking) $340 billion liability - representing 33% of the Commonwealth's gross debt, and 3% of annual Commonwealth outlays ( apparently) utilising tax payer funds, must be properly described and documented.

It is casually referred to in each budget without factual or proper disclosure for a massive debt on the Commonwealth balance sheet. Remember that is the balance sheet of all Australisns.

Let’s be real. DBs are a historic legacy that current taxpayers are paying for from the taxes they pay each year.

The schemes are managed by public servants for public servants ( current and retired).

The schemes benefit politicians (current and retired).

Judges are significant beneficiaries ( current and retired).

The conflicts are blatantly apparent and a full disclosure of the good, the bad and the ugly of these historic schemes needs to be publicly disclosed in a form that is beyond dispute and understandable.

I agree that all superannuation benefits need to be comprehensively reviewed. There is a grossly unfair taxation regime that excessively benefits large personal super accounts.

I argued that point in First Links. In doing so I explained that those benefits flowed from “Costello contribution changes” that occurred with the grandfathering of “some” DBs that were grossly inequitable and unfunded.

Power, wealth, influence and conflict created a serious consequences that have compounded over 21 years.

The conflicted response of the beneficiaries of these excesses- obscurity!

Extra income earned in retirement is also treated differently and to the disadvantage of defined benefit pensioners. Defined benefit pensions are taxed, and this means that any extra income earned by a defined benefits pensioner (whether from dividends or casual pay) is added on top of their taxed pension and taxed accordingly. Whereas accumulation fund pensioners have the benefit of the full tax-free threshold meaning they pay no tax or medicare levy on the first $18,500 (and can get imputation credits fully refunded).

Dear Paul,

I will probably comment in more detail as comments come in from other readers - both conflicted (ie DB beneficiaries) and non conflicted (non beneficiary self funded tax paying ) contributors.

It is interesting to me, that in your whole article you only used the $ symbol once (other than addendums). Over $300 billion in growing liabilities with no reference by you that acknowledges this huge amount, or how or why it continues to grow, whilst the tax payer pays DB pensions each year.

That is one on my issues with the discussion and disclosures of DB liabilities and benefits. Lack of transparency with no informed or factual comments backed by numbers, costs, liabilities, assets, assumptions etc etc. by those who obviously know, but whom chose to keep it away from the public domain.

In this response there are 3 points that I want to immediately make and then ask you one simple question given your unique experience and former position.

1. Where have I ever suggested "impropriety"? I have stated that DB liabilities and the Future Fund's (FF) attempt to meet the liability are cloaked in obscure commentary by those who know more and who either steadfastly refuse to or fail to place the facts on the record. Your commentary continues the trend;

2. I am always at pains to note ( and well informed by contributors) that there are/were various schemes providing different DB pensions and they had different contribution rates. You are simply wrong to suggest otherwise. Further, actual "the closure" of the 2005 scheme, to new entrants, doesn't suggest that it was a scheme that was financially supportable as constructed. It was "probably" closed because it wasn't financially supportable and the disclosure of benefits were "probably" embarrassing to some well known public recipients. You will recall a hostile parliamentary debate at the time;

3. You should reflect on the actual publicly recorded and reported numbers. You implicitly suggest that the original Government forecast liability (in 2006) of $140 billion (by 2020) that would then allow the FF to pay DB pensions (rather than the tax payer), were simply based on normal or common and explainable actuary mistakes. How about backing that up with some written analysis? Today's liability - announced in the Mid Term Budget Update (yesterday) is $314 billion, and it is forecast to grow to $340 billion by June 2029. No pensions are now likely to be paid by the FF before 2032. A bit of history, other than blaming the actuary, that tracks how a $140 billion liability has become a $340 billion liability would be very helpful;

4. A simple question - what was the largest individual DB pension paid to a recipient in FY25 and what was the range of (say) the largest 500 individual pensions paid - pre tax and after tax in FY25? I am sure there are low DBPs paid but lets focus on the largest, particularly given you focussed on a the tax free benefits of a $1.9 million pension account.

If you do not know then can you direct me as to how the public get the answers to that simple question?

Regards

JA

If you look at the CSS annual reports you will see that there are about 91000 pension accounts with payments just under $5000m pa ie less than $55000 per account (which can be multiple pensions where a spouse and child are involved) which in most cases would be fully taxable (with a 10%) tax rebate.

The median pension would no doubt be less than this.

Dear John
All people are conflicted one way or another, whether they are DB recipients, DC members or financial advisers. It is unfair to describe the non beneficiary self funded tax paying contributions as being 'non conflicted' since all of us have contributed to our superannuation, whether DB or DC and both have been tax paying.

The liabilities for DB pensions are entirely due to the government as I mentioned, and will invariably decline since the schemes are closed and people eventually die. The bigger fish to fry is the NDIS etc which are uncontrolled. As for the future fund, if it didn't exist, the liabilities to retired and soon to be retired DB members would still exist; in effect the FF is an artifact actually designed by Peter Costello to reduce the incentive of the then government to spend the money rather than save it.

It's not for me to disclose liabilities etc for DB pensions; there is some disclosure, but is it sufficient? Probably not. But that's true for a lot of government activities. The present government is trying to make FOI harder and there is less transparency in government than in the past.

On your questions.

(1) - the Future Fund is an artifact created during a period of significant budget surpluses to store it away from the future. It is nominally there to meet DB pensions, but not really. Any more than the Medicare levy meets Medicare expenses (it meets less that 25% of Medicare expenses) or the GST gets collected by the Commonwealth and distributed to the States via the CGS. I don't know whether DB liabilities have peaked, they must be close, because there are declining numbers of workers in DB schemes and retirees drop off. There's no doubt that the liabilities are entirely manageable however and each DB member has contributed their after tax income over their working lives (up to 20.5% as I mentioned).

(2) I don't know about the State schemes, but the two major Commonwealth schemes and the Military schemes are based on a government contribution (nominal) of 15.4% supplemented by the member contributions. This has always been fully disclosed - look at the remuneration tribunal determinations for example and you will see a total remuneration which includes (among other things) a 15.4% contribution to either DB or DC schemes.

(3) I don't accept the characterisation since I don't see the FF as being set up entirely for DB pensions. It wasn't. It was to assist in meeting them in the future, but money is fungible so it is really irrelevant. What matters is the efficiency of government spending, whether it is making a surplus or deficit, government net debt etc. If the Future Fund was established and Peter Costello never mentioned public sector pensions would you be making the same claims? The Future Fund would exist and offset government debt and would have defined parameters for when it could be drawn upon. The convenient labelling of DB pensions was unnecessary but politically useful at the time.
(4) I don't know what the largest DB pension is - but that's like saying that some SMSFs have $2 million in assets. I'm pretty confident that the highest DB pension will be when the CEOs of former government businesses such as Qantas, Telstra etc retire. Because to my understanding those who worked in such organisations before privatisation had grandfathered access to DB pensions. So if you're on a DB scheme, have a $10 million salary and have worked for 40 years or so under such a scheme you will no doubt have a very good pension (taxable of course). Anyone on such a scheme whether on a DB or DC will have a pretty good outcome but don't forget CEOs of companies often get millions of dollars in payouts when they leave. I'm not trying to justify that - they are a small number

Hi Paul,

Thank you for your responses.

I understand that the last beneficiary of a Commonwealth Defined Benefit is expected to pass around 2060.

I also understand that the Defined Benefit Liability is not expected to peak before 2036. But that is based on actuary forecasting - so who would know?

I do not believe that there is any doubt that the circa $60 billion injection into the FF in 2006 was to seed the FF, to accumulate assets, to meet the unfunded defined benefit pensions of the Commonwealth, identified in 2006. That was stated in its design.

There was clearly a problem with the closed 2005 scheme and its generous entitlements. There are still about ten sitting politicians whom are beneficiaries of this scheme (yes - 21 years after it closed) and they do not disclose these benefits on their asset register. They do disclose properties (for instance) owned through other investment structures, including SMSFs and family trusts.

It's an interesting conversation that maybe a Senate enquiry could delve into and seek out answers.

Regards

JA

I’d like to add one thing - DB pensions are not particularly generous in reality. If I have some time early next year I will write a separate piece showing the calculations. That is assume two people, both on 1.5 times average weekly earnings, start at 20, work to 60, have an employer contribution of 15.4% and a employee contribution of 10% for those 40 years, then retire and live to 90. One is in the PSS or CSS DB scheme. The other in a DC scheme. My rough caculations - which I need to check - show that the retiree on the DB scheme, assuming average returns, ends up with a higher balance at the end and can purchase a larger annuity than the DB member. Quite a lot larger it seems.

That would be a good article to do. I would appreciate reading it.

Also, it would be good, if the Department of Finance, simply produced a report of the range of the DB pensions paid in FY 25 and to which cohorts ( eg ex politicians, public servants, judges etc etc).

Also, a factual report that outlines in total as to how much was paid in the FY 25 budget into Commonwealth superannuation benefits split between:

1. Defined Benefit pensions; and
2. Current mandatory employment Superannuation contributions

Its taxpayer money so we are entitled to see this.

This article misses the point entirely and can be summed up as “I got mine and I want to keep it”.

This is not an actuarial debate about whether liabilities are “known” or “closed”. It is a question of fairness, incentives and political reality. A scheme can be technically sound based on actuarial life tables from the 90’s, when male life expectancy was 73 years (it’s now 83), and still be socially and economically indefensible when it delivers large, inflation-indexed, lifetime pensions to people who are already well retired, while the rest of the workforce bears all the investment and longevity risk themselves.

The repeated claim that these pensions are “fully taxed” is a distraction. What matters is not marginal tax treatment, but the value of the benefit: a guaranteed, CPI-indexed income for life, paid regardless of market outcomes. Many defined benefit recipients enjoy a standard of retirement security that most Australians will never come close to replicating through accumulation super, and they will leave a tremendous inheritance, with payments many multiples higher than living costs in advanced years. Calling this “fair” because it was agreed to decades ago ignores the substance of the transfer. If it’s so fair, then introduce a death tax on defined benefits to level the field.

History also contradicts the suggestion that governments are somehow constrained from changing these arrangements (though we can be sure that a group of aggrieved octogenarians would call their finest silk friends to stop it). Governments routinely alter retirement schemes when it suits them to start a class war under the pretence of equity. There is no sacred principle that says overly generous public sector pensions must remain untouched while every other group absorbs reform..

“ If it’s so fair, then introduce a death tax on defined benefits to level the field.”

Michael, there is a death tax already on DB - 33% if there is a surviving spouse. And 100% when the surviving spouse dies. If no spouse then it is automatically 100%.
Not sure where DB leaves “a tremendous inheritance”?

Neil, I suspect it is just another of the many misunderstandings of how DB schemes operate.

For the singleton pensioner who carks it soon after retirement, I believe only the residual (if any) relating to their own after tax member contributions and earnings(?) is paid out to the estate. After some years though, the estate gets nothing at all.

In such cases, the government saves a fortune by not having to pay out the majority of the benefit—and of course it had never paid any employer contributions into the scheme when the person was working for it.

Michael, you are correct in that DB schemes provide more security in retirement than having it in an accumulation from a purely peace of mind perspective. That was the trade-off we made: lower pay while working and secure retirement income.

However, I note many people in accumulation schemes are reported to be leaving behind most of their capital when they die, in some cases even higher balances than what they started retirement with. And those with smaller super balances eventually access the part or full age pension, i.e. the government helps support them.

I have read many articles on the so called "unfairness" of the CSS and PSS and how to correct this.
As a former member of CSS and later PSS over a 41 year career in the Australian Public Service, I have had first hand experience with the workings of both schemes.
Many of the articles I've read, particularly those by John Abernathy, do not in my opinion give an accurate description of many aspects.
I wish to commend Paul Lindwall for his very detailed, factual and informative contribution. I could not fault any aspect of it.
He clearly debunked some myths, as well as corrected misstatements and many misunderstandings.
I was tempted to move to private enterprise a number of times as I could have earned a much more competitive salary there. The lower salary paid by the Government employer was generally accepted at the time as being compensated by a Government DB pension. However, for an 18 year old as I was when starting, there was a very, very long time before that compensation was actually able to be accessed.
To review and reduce the benefits for DB retirees would for me be a case of shifting the goal posts after a 41 year period of paying into the DB in GOOD FAITH.
That definitively would not pass the Pub Test in my humble opinion.

"To review and reduce the benefits for DB retirees would for me be a case of shifting the goal posts after a 41 year period of paying into the DB in GOOD FAITH."

With all due respect, this is precisely what happens to the rest of us at the governments whim when they decide to make changes to non DB schemes! New taxes and levies have been introduced, caps made and adjusted. All in the quest to get more revenue and wind back tax concessions.

Your argument is somewhat facile and full of self interest. If the scheme is deemed overly generous or unaffordable government may look at and change it, just as they may for any other ongoing expense/commitment.

James#

A key point is that the government was also the employer so any changes to DB arrangements is not just about changing super rules. It would constitute changing people’s remuneration packages retrospectively, decades later in fact, so the government would then need to work out how to compensate for the historically lower salaries it had paid its workforce over their careers relative to comparable private sector roles. (The main incentives offered by the APS to offset lower pay had been relative job security and DB pensions, both of which have since been eroded.)

I’m sure the DB critics would not appreciate it if their own various employers somehow clawed back their remuneration packages under which they had worked for over 30-40 years, but that is what appears to be implicitly suggested for DB members and pensioners.

As for changes to non-DB schemes, if you’re referring to the Div. 296 proposal, the government had made it clear the proposed tax increases for balances above $3 million would also be applied to DB schemes (based on family law calculations last I heard). That should not affect the majority of relatively modest DB pension recipients, just as it won’t affect the majority of those in non-DB superannuation schemes.

Thanks Roy

Happy to have a dialogue about your statement and your particular opinion

“that I have not given an accurate description of the workings of PSS and CSS”

But your comment fails to identify where I was inaccurate.

Remember - I am an outsider - like about 98% of Australians. You are an insider with unique knowledge. Be great to share your knowledge so misunderstandings are fixed on the public record.

Hi John, I appreciate your offer to debate. However, as Paul has already canvassed and clearly addressed in detail many salient points rebuffing your negative views I see little value in repeating much of what Paul has already addressed.
One thing I would say is that the CSS & PSS schemes contained fixed formula for calculating the end benefit. I won’t go into detail, but it used salary averaging over final years of service rather than the last pay rate of a member.
With PSS there was an option to take part or all as a lump sum and part as a pension. However, that was a once only option at the start that could not be changed later. Non defined funds are not restricted like that, being able to adapt to any changes the government makes to minimise tax. The DB pensions are taxable at the person’s marginal rate, unlike non DB pensions which are normally tax free after 60 years of age.
Regarding the non-funded aspect, that was a decision the government took – it had nothing to do with member choice or any sort of gift to members. If you think about it, the government is the employer as well as the receiver of tax. So by funding, the Government would effectively be taking with the right hand and passing to the left hand. Instead they decided to defer funding and just use consolidated revenue when the pension became payable.

My interpretation of the articles and comments on this issue in this publication and related essays/comments in the MSM, it seems to me that there is an inherent dislike for public servants as a whole, therefore, any perceived "advantages" they receive are immediately criticised - even to the point now of saying the old super schemes should be dismantled. What's that going to achieve? - Fairness?. Public servants also include people who undertake the roles of nurses, doctors, customs and immigration officers, biosecurity officers, vets, police, intelligence community, ambulance officers, diplomats, bus drivers, train drivers the list goes on. Not all public servants sit behind a desk as is the general perception. Is it fair that the 75 year old ex police officer on his super arrangements for the last 20 years be told sorry son, we got to be fair to the new generation, so we are changing your arrangements - your on your own now. Or the 83 year old widow who has received part of her husband's css pension for the last 30 years after he died from work related asthma - sorry love you will have to work things out for yourself now - we have to be fair. These people had no time to adjust their approach to their super pension.

If the superannuation arrangement for public servants was so good why didn't you all join to "reap the benefits" too. There have been no restrictions on entry for well over 50 years.

And to the comment from Michael above it could be summed up as "If I can't have what you have then you can't have it either".

Craig

I think you have completely missed the point.

What is fairness?

If the previous DB schemes were fair then why were they closed 20 years ago?

If Account based super rules are fair then why is Parliament now changing the tax rules applying to them?

I agree - certain public service needs to be appropriately looked after.

But what is appropriate?

Should a benefit worth $200k per year be treated the same as a $50k per year benefit?

Should someone have $10 million in a super account when nurses or bus drivers or police can only dream of such largesse?

I think the debate is about fairness across the whole of super, but we have no factual presentation of what actual sizes of DB pensions ate actually paid, to how many, to what cohorts or for what services. I see no disclosures by the pro DB writers above. I am sure you, like me, would like to know!

The unfairness of the distribution of contributed account based super, with the tax office disclosing balances, large and small, male and female, age cohorts, etc. is well on display. But what does Parliament do to rectify other than a new tax band. Why did it not cap super balances to a reasonable level?

As for your stated 50 year opportunity to join the government service and access DB pension entitlements - I don’t think that is correct.

It is technically accurate that defined benefit pensioners forfeit any investment upside on their balances. It is also true that there is unlikely to be any estate to pass on once the member and any surviving spouse die. However, members who are concerned about these aspects of the scheme design do have a choice. If they meet the conditions of release, they can elect to take a lump sum out of their fund and invest it elsewhere. So, for example, at 60, a PSS member could roll over 50% of their benefit into an accumulation fund where (depending on the member’s superannuation balance) it may now be tax free and able to be both grown and passed on to future generations.

Paul

Thank you for attempting to set the record straight with such a clear piece. It is bemusing why the basic facts of the Commonwealth DB schemes continue to perplex people, as evidenced by some of the comments which regurgitated a lot of the same misinformation you had already just addressed.

Some of the comments unfortunately verged on the absurd and frankly offensive, e.g. I had no idea there was an epidemic of septuagenarian former public servants taking Gen Z spouses, or that older intransigent DB members were taking up space and not “moving on”. My impression was quite the opposite: a substantial amount of corporate memory is being lost in the APS as an experienced cadre of staff are retiring, and replacing them has been somewhat of a challenge. But I shall be sure to mention my modest DB pension in my Tinder profile, if that’s still a thing and should I ever reach that level of desperation.

This is a well-trodden subject so won’t rehash all previously discussed arguments, but just highlight the point that the CPI indexation of pensions not only does not represent an increase in purchasing power, it in fact does not even keep pace with inflation. As we all know, CPI understates the true cost-of-living impact for most of us, given necessities such as groceries, energy, fuel, insurance, etc. increase by considerably more than the peak official 7-8% rate a few years ago (by orders of magnitude more in some cases). Over time, this erodes purchasing power and the value of the DB pension declines—so it’s hardly a “hugely outsized” increase, and less generous than the age pension’s indexation as you say.

However, I would support greater transparency if that will help quell the level of misinformation, often driven by extreme edge cases that get trotted out, rather than what is representative of the vast majority of DB members and pensioners. But as we have seen, not everyone will bother to read or try and comprehend it regardless of what more is put in the public domain.

40 years ago my boss was thinking about leaving the Public Service so as to earn $10k more outside (ie about 30% more). I remember telling him not to forget about the Commonwealth Superannuation Scheme.

It is certainly true that the money the gov't was saving then in salaries it is now paying out in pensions.

And the CSS was certainly generous: I got the impression (maybe wrongly) that a lot of the details were copied from the new USS in the UK (or vice versa) - with one difference, the key number in the CSS was much more generous

Not surprising that the CSS only lasted 14 years

Hi Jeremy

Your comment is important to note.

CSS and PSS schemes are commonly referred to without context and clarification.

As you intimate, the schemes are broadly different with historic rule changes and differing resulting benefits to members.

Those in the schemes ( insiders) know what those differences are and thus the different resulting benefits.

Some excessive, some good and some poor!

All us outsiders ( ie the majority) know is that there is a growing $340 billion liability and that we are paying DB pensions each year from our taxes.

Hi John - in response to your previous post (which hasn't got a Reply button):

You suggest that the last beneficiary is likely to pass in 2060 - that would make me as a CSS beneficiary 103 so 2060 so we will see how that works out...
But if I remarry before then, my then widow (rather than my current wife) will collect the reversionary benefit for life.
If I do as the American Civil War veterans sometimes did, and marry a particularly young lady, that pension plan will keep going well into the 22nd century if she lives to even a moderate age. The last Civil War recipients (e.g. Viola Jackson) appear to have died in 2020, 155 years after the end of the War.
So hopefully that Future Fund lasts another century at least.

A couple of quick points.
The employer superannuation of 15.4% is significantly higher then that for non-government workers.
Most defined benefit schemes allow people to contribute much more then people in other schemes. Salary sacrificing of $100K a year isallowed which gives enormous tax advantages.
Defined benefit pensions are not exposed to market risk.
Other supr funds pay tax on contributions and impose fees which significantly reduce the final balance. Defined benefit pensions do not pay any tax in accumlation mode, even on salary sacrifice contributions.

Given that contributions are taxed at 15% and defined benefit pensions receive a 10% tax reduction, there is a 25% difference on tax paid.
Assume you receive $50K pension a year. There is no tax paid on this in the hand of the recipient. However, after allowing for 15% tax paid by the superfund on all earnings and contribution, the beneficiary will have paid $8,823 tax to receive this amount in the fund.
The tax paid on a $50K defined benefit is $5,788 to the taxpayer,but there is a 10% tax offset so the total tax paid is $788.
People on non-defined benefits pay 11 times as much tax in this example.

The reply rests on two propositions that are simply incorrect: first, that defined benefit (DB) members can salary-sacrifice extraordinary sums such as $100,000 per year, and second, that DB pensions somehow pay “11 times as much tax” as an equivalent accumulation arrangement. Neither claim survives contact with how the schemes actually operate.

First, the salary-sacrifice claim.
There is no world in which a CSS or PSS member can routinely salary-sacrifice $100,000 per year into their defined benefit scheme. DB schemes do not work that way. Contributions are tightly prescribed by scheme rules and by the superannuation tax framework. Just as with accumulation funds, concessional contributions are subject to an annual cap. Any voluntary salary sacrifice above what is permitted does not magically flow into the DB scheme; it triggers excess contributions tax or must be directed to a separate accumulation account.

This is not a special privilege of DB schemes. Accumulation members are subject to exactly the same limits. The idea that DB members enjoy some unique ability to divert vast pre-tax sums into super is a misunderstanding of both the law and scheme design.

Second, DB members do pay tax in accumulation.
A crucial fact is being overlooked. In CSS and PSS, all compulsory member contributions are made from after-tax income. There is no 15 per cent concessional tax on member contributions because they are not concessional to begin with. The employee has already paid full marginal income tax before the money ever enters the scheme.

This matters because it directly rebuts the idea that DB pensions somehow escape tax during working life and are only taxed later. DB members pay tax up-front on their own contributions, year after year, often at high marginal rates. That is very different from an accumulation member whose concessional contributions are taxed at 15 per cent (or 30 per cent under Division 293). Any fair comparison has to account for this.

Third, the “11 times as much tax” claim collapses on inspection.
CSS and PSS pensions are assessable income and taxed at marginal rates in retirement. By contrast, many accumulation retirees over 60 draw pension income that is entirely tax-free. That much is uncontroversial.

But asserting that this leads to “11 times as much tax” is arithmetically and conceptually wrong. It conflates tax paid on contributions with tax paid on benefits, ignores the fact that DB members already paid full income tax on their own contributions during their working lives, and typically assumes a tax-free comparator accumulation pension without acknowledging the tax concessions that made that outcome possible.

Finally, there is no hidden windfall.
DB pensions are fixed by formula. They do not compound. They do not benefit from market booms. They have no estate value and usually cease on the death of the member or surviving spouse. The present value of the benefit shrinks every year as life expectancy shortens. Accumulation accounts, by contrast, can grow tax-free in retirement and be passed on.

Once these facts are acknowledged, the narrative of extraordinary tax privilege evaporates. DB pensions are not undertaxed. They are not vehicles for unlimited salary sacrifice. And they are certainly not some exotic anomaly in the superannuation system. They are a closed, declining set of arrangements that were paid for through compulsory after-tax contributions and are taxed again, year after year, in retirement.

Sorry Ralph,
You are just plain wrong. You seriously need to review your understanding or the schemes you are commenting on, and assign your comments to the appropriate funds.

These types of statements do nothing to further the discussion nor infirm those who seek knowledge and or enlightenment on the topic.

is not the real issue. Governments refuse to provide for their commitments each and every year, then we would not need a future fund to pay for this dishonest omission.

Defined Benefit Pensions
Debate surrounding Commonwealth defined benefit (DB) pensions has often been clouded by misconceptions. Much of the criticism levelled at these pensions is rooted in misunderstandings about their historical context, taxation treatment, actuarial management, and the basic design of superannuation in Australia. A closer examination reveals that DB pensions are neither excessive nor unusual. These pensions are earned through years of service, are subject to taxation, offer predictable benefits, and are steadily losing their real value over time.
1. “Unfunded” Does Not Mean “Overly Generous”
The Commonwealth's DB schemes are described as unfunded because governments historically chose not to pre-fund them. This approach was the standard in public finance throughout much of the 20th century. Importantly, these decisions were made by governments and not by the public servants, judges, military personnel, or politicians who would later become members of these schemes. The fact that these schemes are unfunded does not speak to the generosity of their benefits.
2. DB Pensions Are Funded Through Compulsory Contributions
Members of the CSS and PSS schemes have always contributed a portion of their salaries, often at rates much higher than those required of members in today's accumulation funds. For example, PSS members could contribute up to 10% of their salary, while the notional employer contribution was set at 15.4%. This brings the total effective contribution rate to as much as 25.4%. It is not surprising, then, that such substantial and sustained contributions over many years have resulted in a meaningful pension benefit.
3. DB Pensions Are Fully Taxed; Large Accumulation Pensions Are Not
CSS and PSS pensions are treated as taxable income. In contrast, accumulation pensions—which can amount to several million dollars—are completely tax-free in retirement, including all investment earnings. Furthermore, while a DB pension ceases at death except for a spouse's reversionary benefit, an accumulation balance can be inherited tax-free. From a fairness perspective, it is the accumulation system that warrants greater scrutiny, not DB pensions.
4. No “Double Dipping”
Individuals receiving moderate or high DB pensions are not eligible for the age pension. Only those with relatively small DB pensions—often due to shorter service or lower pay classifications—qualify for a part-pension. Meanwhile, retirees with significant accumulation balances are able to structure their assets in order to access concessions that are not available to DB pensioners.
5. CPI Indexation Is Not a Windfall
Indexing DB pensions to the Consumer Price Index (CPI) only maintains the nominal value of the pension; it does not increase its real purchasing power. Because DB pensions are also subject to taxation, their real after-tax value declines over time. By comparison, the age pension is indexed more generously, as it is linked to both wages and prices.
6. DB Members Surrender All Investment Upside
While DB pensions provide certainty, members do not benefit from market gains, compounding investment returns, or the creation of estate value. For instance, a $3 million accumulation account can continue to grow tax-free and can be passed on to beneficiaries. In contrast, a DB pension generally ends at death. As such, DB schemes are not effective vehicles for intergenerational wealth transfer.
7. Liability Revaluations Are Normal
The actuarial valuation of DB schemes changes depending on factors such as discount rates, inflation, longevity, and scheme rules. These revaluations are a standard part of managing such schemes and do not indicate mismanagement. The Future Fund's schedule has always been flexible and is operating as planned.
8. DB Schemes Are Common and Legitimate
Defined benefit arrangements are found across both the public and private sectors, including military, judicial, political, state, and legacy corporate plans. In Australia, most DB schemes have been closed to new entrants for many years, but the benefits accrued by long-serving members were part of their employment terms.
Conclusion
DB pensions are:
• earned through compulsory contributions
• fully taxed
• closed to new entrants
• declining in real value
• non-transferable and incapable of generating capital
• modest for many members
• actuarially managed and predictable in cost
The available evidence does not support the view that DB pensions represent a fiscal threat or an unfair privilege. If Australia is to achieve fairness and sustainability in retirement incomes, attention should be focused on the accumulation system, not on legacy DB schemes.

Hi Ian.

You also ignore the $340 billion tax payer liability - if that is the final number - and you ignore the decision for the FF to delay paying pensions for at least 15 years past its original design.

The DBs may have been contributed to, at different rates by beneficiaries , but as a whole, these schemes have created a massive liability for today's tax payers - many of whom weren’t born when these schemes and benefits were created. The schemes remain underfunded.

I note the recurrent argument that DBs are the politicians fault and not the fault of the bureaucrats who advise governments. So who is to blame for the complete under estimation of the DB liability in 2006? Anyone still in parliament? Or anyone who regularly pops up on TV or is well paid in a post parliament career?

The recent proposal ( now junked) to introduce unrealised capital gains was supported and justified by Treasury. I guess Treasury would now claim they were merely following instructions.

Finally, the proponents of DBs conveniently ignore the rules that require that withdrawals must be made at an increasing rate from the capital value in account based pension.

They are significant and we need to properly consider them if there is a ever a public review of excessive superannuation benefits - both fully contributed pension accounts and/or DBs.

The withdrawal rules for a complying pension are:

- 6% from 75 years
- 7% from 80 years
- 9% from 85 years
- 11% from 90 years
- 14% from 95 years

Sensibly managed, a 85 yo’s pension account must be substantially invested in low risk cash generating assets ( subject to specific advice) and thus (naturally) they would be reducing their pension capital base and eventually their actual pension as they pass through and on from 85 years of age. It would be depleted at 95 years.

A DB has no such problem with the indexing of their pension.

We need to consider today - What is the average size of a fund of a 85 yo SMSF beneficiary? And what is the average DB pension of a 85 year old beneficiary?

How would a $1.6 million pension fund for a 85 yo compare to a $100k pa indexed DB pension for a 85 yo? Just using the 16 times ratio.

What is the comparative result if both then live to 95?

Maybe one of our readers can accurately work out the actual position - but it appears that the DB pension rises to about $148k pa whilst the capital base of the self funded pensioner would have declined by at least 50% and the annual pension paid at a lower $ rate - and substantially less than a DB $ pension.

John,
My comments are no more isolated than your comments & experience with different super schemes. I find it ironic that you criticize the CSS re: "No benefits accrued", yet earlier & in the past you pronounced the DB scheme as superior to other types of super. I stand by my earlier comments that Paul Lindwall has a much better understanding & his analysis of the Super issues is fair & just. If you need more detail about the CSS simply read Ian's response.

Hi Chris P

I have no idea what you are suggesting or saying.

In your example - which family member got the better super/pension solution and why?

Cheers
JA

Paul,
I commend you for the most factually accurate & fair analysis of the Super systems without the assumptions & speculations. One member of my family has a CSS pension & another with a private pension & from my perspective I know which is fairer.

Hi Chris,

Interesting comment but actually adds nothing to this discussion. But I will counter.

I also have siblings. Three to be exact.

One self funded and one in a DB scheme.

The DB scheme sibling is much better serviced by the DB scheme than the self managed one.

Stress free, consistent indexed pensions, no hassles with managing super assets or complying with the pensions rules inside a defined super asset account etc… Higher cash flows.

But isolated cases mean nothing in a proper analysis. You would rightly request more information re the above to understand the history of each.

My third sibling - worked for the Commonwealth - overseas for about 30 years - in a closely related foreign country ( pre independence) supported by our Commonwealth. He moved from direct public service to various other contracted jobs for world agencies and their legal system over time.

On returning to Australia he found there was no record of his public service for the Commonwealth. Thus - no benefits accrued and the requirement to start his personal super scheme from scratch - at 50 years of age!

Incredible but true!

The problem with the future fund is that nothing can ever be withdrawn without the government being accused of “raiding the piggy bank to pay for fiscal profligacy”. Hence no money is ever withdrawn and the pot just grows indefinitely ... to what end if the money is never used for anything.

It would be better to close the whole fund and give the money back to the taxpayer. Or at the very least put in place a proper drawdown arrangement.

I have read John Abernathy’s article and agree that a fair chunk doesn't hold true. For instance, when talking about mortgages he says, “If 10% of that debt is classified as in stress”. Since when has any Australian bank had 10% of their debt in stress? NAB has a nonperforming loan book of about 1.5%. 

However, some points are valid. We have all seen that actuarial forecasts are often wildly inaccurate. Just look at the insurance industry where premiums are going up year on year due to poor risk analysis years ago.

Just for the record you have taken my comment re mortgage stress out of context.

If housing prices continue to rise and unaffordability increases (a measure of mortgage stress), then the FF presented with the challenge to actually pay DB pensions ( which it doesn’t as yet) could be utilised to take on these mortgage assets to deal with a financial calamity ( remember 1992 ?).

Properly managed mortgages - even in distress- have a return profile that may suit a pension fund.

JA

Before the mid 1950’s income tax was split with a portion labelled as a pension or retirement benefit. This was then changed with all money going into consolidated revenue.

G'day John,
What I'm suggesting is that from my knowledge & experience the member of my family who, considering all issues, and has a private managed Super fund has more flexibility & tax generosity attached to it compared to the CSS member & its advantages. You ask "Why?" These complex issues & salient points have adequately been addressed by well informed commentators already. Perhaps the private member has a sound financial nous.