The super tax and the defined benefits scandal

After reading all comments, I am impressed at the level of technical competence on display. Well done to all. I can probably lay a broader claim to having 'been there, done that' on this issue, and it's difficult to not find something to agree with in most of the comments being made. I was once a Superannuation Manager for a large mutual, and vividly recall the days of RBL's, where lump sums attracted lower benefit levels than pensions. I've watched governments introduce temporary $1m contribution thresholds, and wondered at the pure front of politicians continually reducing contribution limits, so later generations could not share in the same benefits. I've sat at expert witness in the docks of an Industrial Relations tribunal, as representatives of industry super argued with employer institutions as to whose super fund was 'best' for members - while only talking about their fractions of $ variance in dollar monthly admin fees - completely ignoring the asset based fees, regardless of my attempts to bring logic to the discussion. In other words, over many decades, I've watched super devolve into arguments only weakly related to the true basis of early super - to reduce reliance on the country's Age Pension system because of worries about the government's ability to keep making it available to everyone. I've watched that concern morph and twist, as the dollars accumulated reached levels once only dreamed of. And here we are, considering issues related to what is now seen to be an overly-generous super fund. To my mind, what we are looking at here are questions of perspective, fairness, bias and envy. All probably in equal portions. Many years ago the public service traded security of job and avoidance of the corporate jungle for lower wages and a solid super fund to look after them after their grind was done. To change previous accumulated benefits would be extremely wrong - legally and morally. Yes, some will benefit wildly but they operated within the system. What is open to judgement and debate, are the ongoing benefits accumulating from here. That is a very different discussion. It involves questions of wealth disparity across industry/public and across demographics. It involves trying to rebalance lopsided regulatory thresholds, retirement security and again - fairness. Any discussions need to address differences between the median and the mean. They count greatly. And the overall question of just now much tax concession is shared across different levels of superannuation, wealth, income and the unspoken individual/couples inequalities. A starting point would be what the article is calling for. A wider debate, clearer basic numbers and data. Openness and transparency. But these are usually absent debates on superannuation.

Thank you Michael,

You have reiterated as to what I am seeking regarding Super Policy - an open and transparent disclosure and discussion.

Changes need to occur because retirement policy is broken.

To some extent my arguments - to pay out non contributed or low contributed defined benefits from the Future Fund - have been hijacked by comments by those who claim that they have or could have contributed after tax contributions to their pensions, post 2005.

They are not the issue that I was addressing.

Indeed I perceive a deliberate attempt to deviate away from the issue that I was actually focussed upon - a massive unfunded tax payer liability - and to deliberately confuse the debate.

In whose interest is that confusion designed to protect?

Further, whilst there is a complete disconnect between the average wage earner - representing 80% of the population - and those who were and are able to contribute greatly to super - that is not what I was referring to regarding cash outs of some very specific defined benefit liabilities.

I clearly and unambiguously referred to defined benefits that were grandfathered in 2005 that were comprehensively underfunded to the original estimate of $140 billion and now in excess of $320 billion.

I did not suggest that pension funds accumulated from pre or post contributions post 2005 should be cashed out.

Readers can refer to my commentary and compare it to the comments below - then draw their own conclusions.

Hi John,

I think you are being a bit disingenuous with this comment.

Myself and other commentors are talking about the funds that were grandfathered in 2005 – totally on topic. We have also discussed your proposal to confiscate members benefits, given this would be a dangerous slippery slope for our country this is also very worthwhile talking about.

What we are explaining however is that we don’t have a choice of super, we have to contribute to these funds – our employer gives us no other choice!! We are also highlighting that to get any substantial benefit out of these funds members will have been contributing 10% of their gross income out of the their post-tax dollars – this is a massive employee contribution.

I actually believe that our taxation system in this country needs a complete overhaul and this includes super taxation – should an overhaul would benefit of whole country long term. This however is off topic given the vast majority of your article talked solely about defined benefit funds and not ideas for a comprehensive overhaul of super taxes.

Have a great long weekend all.
Larry

John

Thank you for another pot-stirring article on this vexed topic, which has elicited some robust (but larger respectful) comments as before.

I note in this one you have explicitly acknowledged “Inside the cohort of defined benefit beneficiaries are *mostly* people who are modestly and appropriately paid a CSS and PSS pension. These are people who worked hard for the Australia public service and deserve appropriate treatment.” (emphasis added, and I would also include members of military DB schemes who serve(d) their country)

So that suggests you are focusing on a minority of “some seriously well-off recipients” with large DB pensions. It would be useful to have a number on this smaller cohort that has drawn your attention, to put it in perspective relative to the overall “modestly and appropriately paid” CSS/PSS pensioner cohort. What is the threshold above which you deem DB pensions to be immodest and inappropriate? The article indicates perhaps $300k—how many DB pensions are anywhere near that stratospheric level? Not too many I suspect.

In any case, after suggesting others may be deliberately causing confusion, you make this comment: “I clearly and unambiguously referred to defined benefits that were grandfathered in 2005 that were comprehensively underfunded to the original estimate of $140 billion and now in excess of $320 billion.” That would include *all* the hard-working public service CSS/PSS pensioners and members (and the military DB schemes) you seemed to indicate were not in the frame, as well as the much smaller well-off number who you ostensibly are focused on.

To be clear, anyone who retired with a DB pension or is a contributing or preserved member of these DB schemes (many approaching retirement by now) have these “grandfathered” benefits, regardless of the amount. This is what makes your position confusing. Are you just going after a tiny “seriously well-off” minority or everyone who is in a Commonwealth DB scheme?

As Michael noted, the employment bargain public servants who joined during the era of DB super schemes had made was: “Many years ago the public service traded security of job and avoidance of the corporate jungle for lower wages and a solid super fund to look after them after their grind was done.” And “To change previous accumulated benefits would be extremely wrong - legally and morally.” Indeed.

I also highlight an earlier point made by Larry that in order to secure a decent pension for a typical DB member they need to have contributed 10% of their after tax salary for most of their careers, and “perhaps the real issue here is that the rest of the population are not sacrificing current consumption so that they are well set up for retirement.” This is something that is often overlooked given that employees in accumulation superannuation schemes with similar incomes are more likely to be directing savings towards housing than super in their 20s and 30s, noting they can take advantage of catch-up provisions later in their careers—that’s not an option available to DB members if they want a comfortable pension.

Again, there is some confusion in this regard when you previously commented that “In my view, contributed defined benefits (fully or substantially contributed to) should not be adjusted on any basis that does not honor the contributions made by the beneficiaries… However, defined benefit pensions that were not contributed to, or only moderately contributed to, need to be considered through a different lense.” If that’s the case, why keep widening the discussion to the Commonwealth’s total super liability, which mostly covers contributing members and pensioners who did have to contribute consistently to the various public service and military DB schemes in order to generate a decent pension entitlement?

The irony is that if the government were to cash out each and every DB fund member and pensioner in a truly fair and equitable manner, taking into account their lower non-super remuneration over the decades, the taxpayer would be slugged with a massive bill now. At least when a DB pensioner dies prematurely after retirement, the house wins!

John

In you article you mention there is a cohort of defined benefit pensioners who are modestly and appropriately paid a CSS and PSS pension. You mention they have worked hard and deserve appropriate treatment. You also mention there are some seriously well off recipients. For your assistance and others, in 2019 the Superannuated Commonwealth Officers' Association stated that just under 78 % of CSS,PSS, 1922 and PNG pensioners were on pensions under $50,000. If these schemes are so seriously underfunded and the Government wants to redress that problem it will have to come after this cohort . It will not solve the problem by only coming after the seriously well off. The commentators to your article know this hence their concern. We can not take up employment again. There are no second chances.

I suggest that the Government is already tackling the issue. Firstly, when they put a cap on the 10% offset. Now they are going to impose additional taxes on the seriously well off. Might I suggest the Government quarantine these taxes and put them in the Future Fund ? And leave us alone.

Larry and Derek

Ok for now the 4th time I state that the focus of my thought piece is the significantly underfunded benefits that have accrued to some beneficiaries grandfathered in the 2005 closed CSS scheme. Remember the $140 billion shortfall in 2005 dollars? Its now $320 billion!

I am not referring to those who contributed after tax contributions to an accumulation scheme post 2005. I am not proposing to touch the funds represented by after tax contributions.

I did not suggest the confiscation of benefits - I particularly referred to a reset consistent with the new tax proposals of the Government.

Far from it - I suggested payments of up to $3 million “tax free” into a beneficiary’s superannuation account - in a attempt to deal with a massive funding shortfall. To close out a gaping hole in the budget.

As I stated re $3 million payout -if that is not acceptable given that less than 20k super accounts exist today with more than $3 m in them - then I am interested in the argument for more.

Yes Derek - there are some significant indexed pensions being paid to members of the 2005 closed scheme.

It is not hard to imagine ( say) an ex politician retiring prior to 2005 who would be receiving a significant pension.

It is not hard to imagine a politician who may have only been in parliament for just one or two terms, who is receiving a pension that has now been indexed over the last 15 - 20 - 25 - 30 years - into a very large annual pension. It may be taxed but it is still a large pension!

Are you suggesting that these particular indexed pensions for life, and then transferable to a spouse, were properly contributed to and fully funded with after tax contributions prior to 2005?

If you reflected on the issue you would realise that your contributions of after tax salaries, to top up your pension, is being made to balance the excessive benefits going to a few inside scheme who did not appropriately contribute.

It is the same for all taxpayers who today pay tax to meet the unfunded defined benefit pensions each year through the budget - now expected to continue at last through to 2032.

Indeed, every working Australian pays tax and contributes to this shortfall. That includes you and me.

However , the majority are average wage earners, yes average people who will ultimately be drawing a Commonwealth pension at some point in their retirement years.

Rather than disputing the fact that taxpayers are contributing to make up a massive shortfall, and , rather than suggesting that I am proposing some sort of massive robbery of every public servants benefits , it would be better if you turned your thoughts to a solution.

The goverment will reach for the usual solution the nation's credit card as that is guaranteed to upset almost no one. Most people wouldn't know our goverments have borrowed over 1 trillion dollars on behalf of future tax payers who think housing affordability will be their main problem

As a person in their late 40's and been employed in the PSS scheme since 1997, it would be grossly unfair to change any scheme now, we have contributed our salary, and stayed in the job for the the benefits offered, several years of low pay rises, Liberal governments paying little.

I really hope they don't change anything as the 70,000 odd public servants still on it from APS3's to SES staff have worked, contributed and we can't get back time. When jobs were $80k in private sector but we stayed on $60k.

I get it is expensive, but they made the rules and we have played by them. I mean if they want to offer $5m compensation and allow me to retire sooner, I would sign it away

Thank you Pete

I assume that you are the same Pete who commented below.

I appreciate your comments and contention - that you signed up to something, abided by the rules and that you do not believe the rules should be changed.

Whether you have been treated fairly, when compared to others in your cohort (public service), or across society, may not be pressing concern to you. A plan to retire at 55 is a personal choice that will take significant sacrifice to achieve.

As is also well argued by Self Funded Retirees, they signed up to a deal as well, and they do not want it changed - again! . So we have a majority today - who do not want change - except if it is to their advantage.

But we have a Government who wants change because they claim (determined?) that it is an unfair system. However, it is clear that the full extent of the unfairness is something that they do not really want to openly debate or expose to the public.

Self interest v National interest is a common public policy concern.

The interests of a current generation over a future generation is also a common concern, that is difficult to address , normally deviated from in argument and often avoided by politicians. Today's voters are more important and have much more weight than future voters.

We trust our political leaders to guide us in reaching in the right policy for society, to not create an unfair benefit for themselves and to do so in an open or transparent fashion , that considers current and future generations.

However, today, I think the superannuation entitlements debate, across society, are both greatly and excessively influenced by self interest, with the interests of a current over future generations shining through.

It is interesting to observe that past politicians are completely absent in this debate, particularly as as it applies to their entitlements. Their benefits remain cloaked in secrecy. Why?

I merely point to the fact that our Future Fund is still underfunded by $80 billion (stated) and more likely by hundreds of billions, if the truth was known.

If today's generation, as advised by Government and Bureaucracy, believe that we have a fair and sustainable superannuation system, then we should do nothing.

But I fear that it's a very similar thought process, indeed similar advice, to that which results in our society passively watching the housing bubble grow. We watch housing become increasingly unaffordable to our younger families, with no concern for a future generation, as we bask in the perceived wealth creation of residential property gains.

Is it sustainable? Does anyone care?

I wonder what our children and grandchildren will think when they reflect on what we could have done, but didn't regarding both superannuation benefits and housing.

But I guess we are cancelling 25% of their HECs debt, whilst current tax payers, and those people that paid their HECs in full, are not complaining about a change in the rules.

Whilst I am on one and would go to great lengths to retain it, I recall being about 26 when they changed the schemes, I remember them doing a presentation and then the union lady telling us we would be insane to give up a defined pension, but about a year later when I was working in the Treasury department I recall there being a paper, there was something in the trust deed of the CSS/PSS preventing them from ending it completely or essentially grandfathering those in the scheme, almost like they the law makers ensured it would remain (people like me APS 4's at the time were fortunate cohorts but I doubt we were the intended group they were thinking about)

I started in the public service when I was 19 and frankly the idea of them changing a scheme that we have been on for over 28 years on would be grossly unfair, regardless of what the public thinks, as we can't get that time back, I have contributed 10% of my own money for 28 years to a scheme as the rules were clear.

If they wanted to change it, and I think what would be found to be true if they tried in the high court, would be they either have to pay out the 307k people on these schemes or just accept that they have to pay.

We won't get back those 28 years, and I would use every last cent I had in fighting or class action, or as said I would take a settlement payment of $4-5m tax free, but they would have to pay me at 55 and allow me to retire anything outside of that I would not sign to.

My pension will be about $135k a year, the way the calculation for judges and politicians is done I am not sure of, but for those public servants it is a combination time in service, contribution rate and your average salary of the last 3 years, now at 85 that $135 will grow to $275k a year (based on 2.9% annual indexation) at 85 will I need $275k (assuming I live that long) , but that is the scheme they created in and that is the scheme they ended.. I am very thankful there are several barriers that would be met to can the scheme they have encouraged us to contribute to.

"It was a well cloaked arrangement between the Parliament and Australia’s influential and wealthy - to retain excessive indexed pension entitlements for retired and retiring public servants, (including politicians and senior bureaucrats) whilst granting benefits to a wealthy elite.

It is important to acknowledge that Defined Benefit beneficiaries dominated the seats of Parliament of 2006."

This sounds like another example of the "Game of Mates" as described by Cameron Murray in his book "Rigged". It should be on the best reads guide for all Australian taxpayers.

John I don't like the Govt's planned Div 296 super tax as many on here and else where don't, but I tell you what would worry me even more, this quote from your article above:
"If that is the case, then a ‘reasonable’ reset of the tax benefits that flow to large super accounts is proper BUT so too is the reset of the defined benefit pensions that can be regarded, on any reasonable basis, as being grossly excessive."
John maybe we have different meanings for the term reset, it seems like you are proposing confiscating (changing) public servants retirement savings, where you deem them to be excessive; or have I misunderstood your claim here? In the cold light of a new day I'm sure you'd appreciate that this is neither fair nor appropriate.
To achieve any substantial super payout from these schemes the public servants would need to have been contributing 10% of their post-tax income to the scheme for almost all over their working lives (this is a huge hit to their yearly income) and then they are taxed on their pensions at their marginal tax rate. If the CEO of a bank or other large company in this country had been contributing 10% of their post tax income for their entire working lives you can be sure they'd have much greater super balance than the public servant, which I don't see you complaining about.
Changing tax laws is one thing, taking away (altering) people retirement savings, housing, bank balances or anything else is entirely different all together and a very dangerous precedent and if we are going down that slippery slope it needs to be applied community wide to all forms of wealth and income!
First Links - I would strongly encourage you to have John publish a detailed example of what this "reset" he is proposing would look like!

Thank you Larry for the challenge to have a discussion about "reasonable defined benefits" . In particular to address your concern, but with a backgrounding of the effect that some specific, arguably excessive, unfunded, non contributed, DBs have on current and foreseeable budget outcomes.

At the outset let me assure you that I am not the government, nor am I a Treasury official, and nor have I been asked to advise the Government or Treasury. So don't panic.

Let's commence with some observations.

I have consistently suggested, almost from the commencement of the Future Fund (FF), that the FF would be insufficient, at the originally targeted level of $140 billion, to meet the unfunded liabilities of the uncontributed and unfunded Commonwealth defined benefit schemes. The schemes that were grandfathered in 2005.

Importantly, over successive years from about 2016, Treasury has begrudgingly admitted, consistently hidden in small print, in each Federal Budget, that the original actuarial estimated liability was greatly miscalculated.

The original miscalculation is now wrong by at least $180 billion (latest estimate is now $320 billion) - and the liability is still growing.

We know from the FY25 Budget papers that the Public Service pension liability may only peak in 2036. The Defence pension liability peaks around 2060.

Therefore, annual pension increases, through indexing, are growing the liability. It will not peak for many decades unless it is checked or reset.

I believe that the gross miscalculation in 2005/6 directly led to and was used (at the time) to justify:

1. the grandfathering of "some" excessive unfunded DB pension entitlements - known or expected to accumulate;
2. the concurrent approval of excessive contribution allowances to superannuation accounts without an appropriate "reasonable asset or benefit" restriction consistent with sensible public policy; and
3. the creation of the FF, seeded with about $60 billion of public funds, based on a forecast that was presented as properly and appropriately calculated.

I am concerned, and every Australian should also be concerned, about the growing and massive pension liability, that is currently drawing (according to the AFR) about $20 billion from the Australian budget each year - equivalent to about 2.5% of annual budget outlays.

Therefore, tax payers are today ( and for the foreseeable future) contributing to grandfathered DB pensions of 2005. They do so whilst the $240 billion FF accumulates funds for an unclear purpose, with no clear statement of intention to disburse, nor consistent with a stated plan that has been publicly investigated , researched, debated and documented.

That is the background - so let me talk about your specific question.

I immediately see that you have focussed on "contributed" defined benefits as opposed to "non contributed" defined benefits.

In my view, contributed defined benefits (fully or substantially contributed to) should not be adjusted on any basis that does not honor the contributions made by the beneficiaries. I agree with your view.

However, defined benefit pensions that were not contributed to, or only moderately contributed to, need to be considered through a different lense. Particularly, if those pensions greatly exceed what the public would consider as reasonable to meet the recipients needs for "a dignified retirement".

Fairness, reasonableness and transparency, would guide an independent review to an appropriate basis to pay out these liabilities with a lump sum so as to alleviate the need for taxpayers, current and future, through the budget, to divert scarce public funds, away from more essential budget and social needs.

Such a cash out payment, should only go into the super account of the beneficiary, putting those individuals into the same position and demanding from them the same responsibility, as that of virtually every other Australian worker or retiree (i.e. manage your own individual super/pension account).

What would be a "fair and reasonable cash payment" to dispense the liability of each beneficiary? - would be settled with appropriate rules or calculations set and based (amongst other considerations) on the age and the current pre tax pension (last 12 months).

These would be settled by an appropriate independent body that would advise the Parliament.

It seems to me that such a review may propose that low annual rates of DB pensions may be marked up by a higher cash out multiple, whilst larger DB pensions would be marked down by a lower cash out multiple.

Common sense would suggest that the cash out of an older beneficiary would be marked down whilst a younger beneficiary would be appropriately marked up.

The limits to cash payouts (tax free into a super fund) may be set at a maximum of $3 million, based on the clear current view of the Government, Treasury and the Greens. That is open for discussion and I would be interested to hear the view that argues that a $3 million tax free payout could be considered as unreasonable.

Finally, if it is directed that the restructure and total payments is limited to $240 billion, which is the current amount in the FF, then the Independent Advisory Committee (IAC) will need to derive their recommended payouts inside that total.

Ofcourse, if the IAC declares that significantly more than $240 billion is required, then the Australian taxpayer will then be properly informed of the magnitude of the unfunded liability. That would lead to another discussion and a plan to fix this huge problem.

However, if less than or equal to $240 billion is achievable and set, the taxpayer is instantly relieved of the annual payment of these pensions, the budget will be in much better shape and a allocation to important social services - think health care, aged care, child care, housing affordability, energy generation and education - can be addressed.

My suggestions are designed to stimulate a public discussion to generate a fair and reasonable outcome to close out, if possible, a serious flaw in our retirement policy settings, that has been cleverly hidden from a proper and informed public debate.

John, I assume you are talking about a payout regime which will be voluntary. To me any offer made by a future Government would need to be an optional scheme otherwise it would be unfair and probably subject to Constitutional challenge. Your Article seems to suggest an optional scheme as you differentiate between ordinary DB pensioners and those with large pensions. Maybe the problem will be solved in another way if the new DIV 296 tax is going to claw back some of these large DB pensions. There was an article published in the Fin Review on 28 May about the new tax on top public servants. The sums involved seem to be considerable when they retire. There was an example of a Departmental Secretary having to pay $320k DIV 296 tax in the first year of retirement. Perhaps all tax collected in this way from public servants should go into the Future Fund.

Any payout would only be acceptable to a pensioner if that person's circumstances suited at the time. If the family law methodology is used I can not see many older members accepting an offer because the factor reduces with age. At 79 it is only 9.19 which does not produce a large lump sum except perhaps for people on large pensions. If a person had a decent allocated pension as well as the DB pension it might make sense if they wanted capital to go into aged care.

Hi John – thanks for your considered response, I certainly appreciate your time to prepare such a response and it gives plenty for the reader digest.

I wasn’t aware the Commonwealth had any non-contributed defined benefit schemes (at least any major ones) and couldn’t find any references to them on the internet. Could you point me to these schemes so I can read more about them? Regardless the biggest scheme for Commonwealth public servants is PSS and this is a contribution based scheme with members contributing 10% of their post-tax salary to receive any significant pension. Confiscation of these pensions above a certain value would be truly reprehensible and radically change the sovereign risk applied to investing, working on even living in Australia – I truly don’t think this is the slippery slope we want to proceed down as a nation!!

I know you genuinely believe these schemes are excessively generous, but I don’t think you are taking into account how much employees are contributing. Thus as an example I ran the numbers on PSS vs PSSdb (or UniSuper) for two notional public servants and the results may surprise you (and others). One of my notional public servants joined in May-2005 (PSS defined benefit) and one joined in Jul-2005 (PSS accumulation; aka normal super). They both had the same starting salary, career trajectory and both retired at age 60. They both contributed 10% of their post-tax salary every year to their superannuation fund (the max allowed under PSS – to thus generate the biggest possible PSS defined benefit payout).

For the accumulation plan member this 10% post-tax equivalent contribution was made concessionally up to their limits and then non-concessionally when above the limit. Both members contributed $1.785m to super over their career. The defined benefit member ended up with a lump sum payout of $3.86m (or a pension of $351k/yr - taxed) the accumulation plan member ended up with a $6.54m (yes much bigger) which should support a retirement income of $260k-$300k (with more favourable tax treatment). Which one of those is better John? It would have said horses courses, one has more flexibility the other more security (unless confiscation comes in).

John should either of these members have their superannuation reduced / “reset” (confiscated)? The end payouts are big in both cases, but their personal contributions are huge and the big numbers really just reflect the power of compound interest.

If we insist of going down this path of confiscation / limiting benefits then it should be all superannuation that is “reset” not just public servants in defined benefit schemes. Would you be open to the Government taking all super greater than a $3m balance? As this is what you are proposing for the public servants.

It should also be remember that members of these schemes defined benefit schemes took jobs taking into account that the anemic wages paid by the Government was part of a salary package that included superannuation. You also seem to represent just the liability side of the these pensions, but you don’t seem to have accounted for the fact that these pensions are all taxed at the recipients marginal tax rate (less a 10% tax offset on some portion). This fact alone means that the recipients of the highest pensions are taxed at the top marginal tax rate and the big pensions from the schemes are only “worth” 55% of the stated value on the “employer” component.

Finally I note in your article and your reply you highlight that the headline (nominal) cost of defined benefit pensions rises as the purchasing power of our dollar is eroded through inflation (something we should all be conscious of), the real cost of a pension does not increase from day one. In fact one could mount quite a reasonable argument that CPI way under-represents the erosion in purchasing power experienced by your average individual and thus these pensions actually decrease in real term from day one. The PSS and CSS long term cost report predicts that the cost of the scheme payouts will reduce from 0.28% of GDP in 2024 to 0.04% of GDP in 2063 neither of which is significant when compared to other government costs (NDIS ~6% of GDP currently).

Thanks again for your reply John – whilst we disagree on the fairness of confiscating / capping public servant superannuation, I do appreciate your regard for partaking civilised discussion beyond just a headline snipped (ie a properly explained position). This skill is very often lost in modern society and particularly internet forums. So thank you.

"The limits to cash payouts (tax free into a super fund) may be set at a maximum of $3 million, based on the clear current view of the Government, Treasury and the Greens. That is open for discussion and I would be interested to hear the view that argues that a $3 million tax free payout could be considered as unreasonable "
As a person planning on retiring at 55 I assure you that is unreasonable, I would not sign it away. now if they gave it to be tax free at 55 or sooner I would seriously think about it.

But No I am not wanting it changed at all.

Hi Larry

I cannot possibly comment on or confirm the validity of your comment below:

"For the accumulation plan member this 10% post-tax equivalent contribution was made concessionally up to their limits and then non-concessionally when above the limit. Both members contributed $1.785m to super over their career. The defined benefit member ended up with a lump sum payout of $3.86m (or a pension of $351k/yr - taxed) the accumulation plan member ended up with a $6.54m (yes much bigger) which should support a retirement income of $260k-$300k (with more favourable tax treatment). Which one of those is better John? It would have said horses courses, one has more flexibility the other more security (unless confiscation comes in)."

They seem to be both incredibly high contributions and entitlements from the public service employment. But you may be right.

Regarding non contributed, partly contributed or lowly contributed defined benefits pension entitlements, there are many schemes that have had the result, that the benefits promised by the Government (as employer) to public servants, of all cohorts, cannot be funded except by a massive continuous payment by the taxpayer - past, present and future,.

The schemes may not be openly declared or described as non-contributory, but if the entitlement greatly and grossly exceeds the contribution, and that shortfall has to be made up by the taxpayer, then I would respectively suggest that such schemes have not been contributed to - either adequately or properly or fairly.

Further, if tax is paid on an entitlement, that is underfunded and/or lowly contributed to, then that does not seem to be a problem in equity. A winner of a lottery receives his payment tax free - not the earnings from the capital won.

But as I was at pains to state - there is clearly a significant and large cohort of ex public servants whom can rightly claim that the Public Service Schemes did not work for them - and in stark contrast to the benefits received by some highly paid public servants, politicians, judges and senior defence personel.

Australian tax payers have probably contributed in excess of $300 billion (PV much higher) to defined benefit scheme pensions since 2005. The Future Fund has $240 billion in it and remains grossly underfunded against stated liabilities. This situation does not result from having a properly funded scheme where every beneficiary contributed fairly and equally.

Finally, if ever the liability was properly investigated and then presented for public scrutiny, then it is my guess that maybe 20% of the beneficiaries are probably entitled to 80% of the underfunded liability. But who knows?

Hi John,

I can confirm those numbers are correct and I think the key thing is not to focus on the numbers themselves, but rather the concepts, the marvels, of compound interest and regular contributions. Regardless of your salary, high or low, if you contribute 10% of your post-tax income (or the equivalent in pre-tax dollars) to your super every year for 38 years you are going to have a healthy balance. And anyone doing this is going to have a super balance that greatly exceed the super balance of those that only receive the standard employer contribution and don’t contribute themselves. It’s hard to argue with this logic!!! I’d be happy to share my working on these figures if anyone would like to dispute them.

The greatly misunderstood point here is that PSS and its military counterpart schemes made it easy for public servants to contribute 10% of their post-tax income to their super, in fact the scheme encourages it! This, and only this, is how you get the big super balances!! Without this 10% post-tax contribution, no matter the public servants salary, their super balance, will not be impressive in anyway (esp. compared to their private sector peers)

It is my opinion that people that have contributed 10% of their post-tax income to their super for their entire working lives should not have their super confiscated in anyway shape or form. It is my belief that doing so would set an extremely dangerous precedent!!!

To Larry and Pete,

Thank you for your contributions.

To wrap the discussion up from my end it is worth reflecting upon the following - which are reported facts:

1. The set retirement age to receive the Commonwealth Pension is 67 years of age;
2. This pension is means tested and it is on the public record that 70% of retirees will qualify for a full or part pension;
3. The average person retires with about $350k in super;
4. The Commonwealth pension is $29k single and $45k a couple pa;
5. Today the average self funded retiree (running a SMSF) has $1 million in their account;
5. The number of non ex public servants who could claim to have over $3 million in their account is in the low tens of thousands; and
6. The number of ex public servants ( etc) who can claim a Defined Benefit Pension that is worth more than $3m is unknown.

This debate and discussion needs much more information.

The above facts are worth reflecting upon.

However, I appreciate your concerns with your personal circumstances.

Hi John,

Thank you again for the engagement. Whilst I all your points might be valid facts they are not relevant to the discussion at hand, as they are general in nature and don’t relate to the specific circumstance. Kind of like saying the median Syd house price is $1.6m and thus you should be able to buy a 5-beddy in Point Piper for $1.6m; as we all the general fact isn’t relevant in the specific circumstance.

The key points you are failing to understand are the following:
- PSS members are encouraged to make a contribution of 10% of their gross salary (contrition is made post-tax non-concessionally though) to maximise there superannuation and many do.
- Making a of your salary as an 10% employee contribution each year for your entire working life (let’s say 38 yrs) is a lot of money
- Compounding interest!! Given the huge employee contributions made into these super schemes compounding interest is amazing over 38 years!!

I totally understand that when these huge voluntary employee contributions are made super balances can become quite large – perhaps the real issue here is that the rest of the population are not sacrificing current consumption so that they are well set up for retirement.

With this in mind I’m going to share the calculator I have developed that allows anyone (with normal accumulation super not defined benefit super) calculator what their super balance could be if they do (had) contributed 10% of their salary for their working life. I’ll share this in a separate message in case FirstLinks don’t like links to static html pages (perhaps you could host it yourselves if you won’t let me link). You’ll be surprised by the results!!!

Link the super calculator that allows you to tweak your employee contributions. Remembering if you want to compare with PSS you should set your employee contributions at the 10% level (calculator default)

https://claude.ai/public/artifacts/dc4a16f5-e8d0-4893-9db3-8873671e5858

John, while it may be true that the Commonwealth has not fully funded its superannuation liabilities that is not the fault of defined benefit pensioners. Governments have failed to contribute the employer component with fortnightly pay as other employers have had to do. The great majority of defined benefit pensioners do not have large pensions. The Australian Council of Public Sector Retiree Organisations ( ACPSRO ) should have much of the information you need.

I am in receipt of a modest Commonwealth defined benefit pension. I call it my dying pension for a couple of reasons., Firstly, the most value it ever had was on day 1 of my retirement and it has lost value steadily since because it is not indexed to the cost of living. The CPI is not a cost of living index as the Australian Statistician will confirm. Secondly, my pension dies with me.

My pension is treated harshly for Centrelink purposes compared to private allocated pensions. Some years ago Morrison decided that we were all rorters and said so on page one of the Telegraph. Because some few State employees were using their advantage of high tax free components to claim age pension the Government put an arbitrary cap of 10% for our tax free components. My tax free component was over 20% from my own after tax contributions but I was a rorter .

I agree with Larry that we would have been much better off with an accumulation account over the last 30 or 40 years with 10 % after tax contributions and this would have been the case even if our employer had just matched our contributions. It would be interesting to get some feedback from current public servants who started in the new schemes after 2005. I also have an industry fund that had very low balances initially . Since 2007 when I retired this fund has increased over 300 % thanks to compounding and no withdrawals. So the defined benefit pension is not all it is cracked up to be. The grass is always greener on the other side . For those looking over at our side appearances can be deceptive.

For the purpose of assessing the value of a CSS Pension as part of a person's Superannuation income (re Unrealised CGT formula), will the annual CSS pension have a Deeming factor applied which calculates the amount this contributes to the $3m threshold?
If this were to be the case, would the Deeming factor be varied according to a person's age/life expectancy?

The government will be using the valuation methodology set out in the Family Law (Superannuation)(Methods and Factors for Valuing Particular Superannuation Interests) Approval 2003. This methodology does take into account a person's age and gender. Put simply, the older you are, the less the overall value of your superannuation pension because the government won't have to keep paying it for as long. As females are expected to live longer than males, the overall value of their superannuation is valued higher than a male's at all ages. Whether or not a reversionary pension element applies also affects the valuation to some extent. For example, a 65 year old man with a 62 year old female spouse would need a DB pension of about $244,000 before triggering a Div 296 tax liability. A 62 year old woman would only need $194,000. Very few public servants now retired would be receiving these levels of pension, but future ones might. Increasingly, widowed spouses in receipt of both their own and their deceased spouse's reversionary pension may reach these combined pension levels too. As public sector wages increase over the next 20 years, many more PSS new retirees may find their pension triggers the liability if the government does not index the $3 million threshold.

Hi Jane
Thanks for the clarification.
Has the government decided on the additional tax rate to apply to CSS pension payments when a self funded retiree has a balance over $3 million?
Members of contribution type funds will pay an extra 15% in tax on earnings on any balance over $3 million bringing the total to 30%. CSS pensioners already pay tax on their pensions at their marginal rate (less 10% offset) that works out to be about 27% + 2% Medicare levy). For those with other superannuation that will now exceed the $3 million threshold will they pay an extra 30% tax on their pensions bringing the tax rate on their pensions to 57%?

Jane, I believe you are correct about the methodology of applying the valuation of DB interests. It is my understanding that the new DIV 296 tax will only apply in the accumulation phase ( AFR Article 10-11 May- Five ways to deal with Labor's $3m Super tax increase ) . If that is correct then it would not apply to current DB pensioners. I assume it will be applied to current and future public servants to work out if they are over the $3 million threshold and then an interest rate is applied and carried forward to retirement. Then I assume the liability will be deducted from the end benefit. In retirement there is a cap of $1.9 million for non DB pensioners and if they go over that in transferring money over they have to out it back in accumulation phase. For DB pensioners over the pension cap they lose further 10% offset. Many of the Articles I have read recently seem to be talking about the new tax being applied to pensions which is at odds with the Article in the Fin Review quoted above. I gather there would be very few current public servants subject to the new regime. That article recommends SMSF members starting an allocated pension to bring down their excess $3 million balance . If the new DIV tax does not apply to SMSF members in pension phase ( as the Article suggests ) then it would be inequitable to apply it to current DB pensioners. If it is to apply to DB pensioner then it should only apply to new pensioners after 30 June 2026 who bring over a liability accumulated after the new tax commenced ( assuming it is not deducted first ).

I need to correct my earlier comment about the new DIV 296 tax applying only to super accumulation accounts. The Article in the Fin review of 10-11 May seems to be a bit misleading as the new tax will apply to the Total Super Balance which exceeds $3million. This includes accumulation and retirement accounts. The strategy of putting $1.9 million into an allocated pension will reduce tax to zero in pension mode after 60 but the value of the account still counts towards the $3 million cap. I assume that person would pay 0 % tax on the first $1.9 million then 15 % on the first $1.1 million in accumulation mode then the DIV 296 tax. For defined benefit pensioners the family law methodology will probably apply using life expectancy. As Bruce Bennett mentions what if the value of the DB pension exceeds $3 million ? If the pensioner is a CSS or PSSdb member paying a high marginal rate of tax does the DIV 296 tax get added to that ? I believe there is a pending article in the Australian about the disquiet among DB pensioners on the new tax.

Defined benefit pensions have a Fiscal advantage because they are solely for retirement. Accumulation fund retirees have three other issues (a) conservative drawdowns for fear of below par returns, (b) unsure how long you may live and (c) deliberate Estate planning.

"(a) conservative drawdowns for fear of below par returns,"

Draw down as required and then become eligible for the tax payer funded safety net, defined benefit scheme that is the Age Pension, if Plan A goes to pot! Any challenge has a solution (perhaps not the most desirable), of sorts!

Whe I joined the public service nearly 60yrs ago I had no choice but to join the Govt Super Scheme and had to pay 5 to10% of my Salary into super. I chose the later. I was a middle level PS when I retired and never earnt more than $20 per hour. I chose to take my defined benefit super as all pension. If my wife and I died the next day there was no residual benefit. My pension took 20yrs to double and the aged pension is rapidly catching it. Whilst I believe we should all be on the same type of scheme under the same rules but the focus on politicians and public service is unreasonable when you look at the Salaries and Super company executives get in the Private Sector; and they aren't any smarter nor do they work harder. Excessive wealth accumulation and passing the money to next generation should be banned as it is with my Super. My partner gets a 66% pension if I die first and when we both are dead nothing is paid to my estate. At the moment my Super is valued at over $600k. and it goes to the Govt, probably the Future Fund.

"Whilst I believe we should all be on the same type of scheme under the same rules but the focus on politicians and public service is unreasonable when you look at the Salaries and Super company executives get in the Private Sector; and they aren't any smarter nor do they work harder."

That ship has long since sailed! Public service salaries and super have more than caught up with the private sector in aggregate! Public service super 15.4% compared to non public service soon to be 12%! Family member was working for private company that contracted out to state government. Was poached by government to do same job. Massive pay rise and more super to boot. Go figure. "Free" tax payer money easy to deploy with no accountability. Guess that's why our state governments are becoming so indebted too!

Hi Greg, the government pays out the residue pension when both of you die. That's assuming you have not be allocated your full pension over roughly 12 years. The calculation is the lump sum minus the fortnightly pension allocated E.g if both of you die 2 weeks after retirement, then let's say the lump sum is 1 million dollars, the estate would be paid 1 Million dollars - the fortnightly pension. The government never gets your money.The only thing here the lump sum is not calculated to be earning anything.

Having moved to Australia from NZ twenty years ago, I invested in super not a home because the equity in the house I sold in NZ (some years later) could not buy me a place I wanted to live in Melbourne. I invested in super in good faith based on the tax regime at the time. Nearing retirement age I just passed $3m threshold in super, but at the same time a renter. I am fortunate, but does that really make me part of the wealthy elite?

Isn’t the new tax on super in effect a retrospective tax given money was invested on one set of rules, but is now subject to another new tax and cannot be removed in accumulation phase.

Thank you for highlighting the inequity of tax payer funded defined benefits. The Treasurer has a lot of explaining of do to justify how his boss on his overly generous DBS will be equally affected.

Solution-withdraw all your super as a lump sum the moment you reach pension eligible age-buy the most expensive house you can afford and hit the govt for a taxpayer funded pension - simples.

.....and it will leave you asset rich and cash poor, and perhaps unhappier!

When I signed up (on entry) for Commonwealth Super in 1962, I was enrolled in the defined benefits scheme (CSS). I worked through a long period when salaries moved very slowly. My pension on retirement was in line with the established commitments, with modest indexation. It’s OK but not remarkable, and I have survived retirement for over 20 years. Some years later (about 2000) there was a very significant increase in senior Commonwealth salaries, for public servants and politicians, which created a problem for the rigid defined benefits schemes. Apparently these very high salaries were then discounted for superannuation pension purposes but the details were not publicly available. The individuals involved seemed to end up very happy. On retirement they received a very good pension, with indexation. Not quite as big as some simple estimates (because of that discounting) but still very substantial, perhaps surprisingly so. This is a large part of the current problem, which Governments never addressed properly. There is a big differentiation between earlier retirees and later retirees. However, the earlier group are unlikely to hit the $3million benchmark while the later group might well, depending on how all of this ends up being defined. Very complex and not easy to deal with equitably. And the draft legislation has not addressed these issues.

Being in the advice industry when the future fund was established, it was always my understanding that the fund's objective was to tackle and then eliminate the Government's unfunded pension liability (although I did always wonder about the "future" label). Why does Government continue to mislead the general public that the fund might be for other purposes? I understand that the legislation was left open but why? It also disappoints me when the media calls the future fund a sovereign wealth fund because in my view it really isn't.

By the way, yes we should have a sovereign wealth fund, off the back of helping China industrialise, but we don't.

Defined benefits schemes DO NOT carry an inheritance beyond the death of the recipient save for 5/8th pension going to a surviving partner for her/his life, providing they were co-habiting prior to retirement, and to any student children. I cannot image two persons in their retirement years having children!!!

Thanks Roger

I have tried to cover your perception in other answers.

It is correct for low Defined Benefit Pensions ( DBP) but wrong for large or excessive DBPs.

Suffice to that a large or excessive SMSF is just as problematical as a large or excessive DBP.

They may not carry an inheritance beyond death, but the sheer size of the amounts paid means that there will be a sizeable pool of cash available to hand on.
My taxes being used to give large handouts to the children of politicians and judges.

Just for a bit of context and flavour, the latest PSS and CSS Long Term Cost Report 2023 produced by the Department of Finance has noted that as at 30 June 2023 the average annual CSS pension is $56,351 pa and the average PSS Pension is $45,158 pa. The average dependent pension for CSS is $28,536 and PSS is $24,769. These do not appear to be exorbitant incomes.

Thanks Craig

Its the same distribution profile for SMSFs.

The bulk and indeed the average size of SMSFs is about $1 million. These would pay out $40k in pension in early retirement years.

The issue is the small percentage of large SMSFs that are attracting a taxation response - unrealised gains that most self managed retirees object to.

In the Defined Benefits space there is an equally small percentage of recipients who are receiving very large indexed pensions.

There needs to be a equitable and fair review of excessive pension benefits and excessively large SMSFs.
A good start would be for Treasury to advise the:
1. The number of Defined Benefit pensions to be put clearly on the public record - current and future;
2. The bands of these pensions ie less than $50k; $100k etc and over $200k; over $300k etc
3. The ages of the recipients; and
4. The various tax treatments on receipt.

As I clearly stated in my thought piece there are many ex public servants whom deserve their payments - and probably more. “These are people who worked hard for the Australia public service and deserve appropriate treatment.”

However, there are some that are benefiting excessively and affecting the funding of these benefits by the taxpayer.

My suspicion is that some Defined Benefits are grossly excessive. But happy to proven wrong by a Treasury Report.

Whilst the focus of this legislation has been on politicians and judges the Commonwealth Superannuation Corporation has not provided any information as to how self funded retirees with CSS defined benefit pensions will be impacted by these taxes. For example:
a) There is no provision in the SUPERANNUATION ACT of 1976 which established the CSS to pay a balance or make lump sum payment, even on compassionate grounds. The Act only requires the Commonwealth to pay a fortnightly pension, based on final salary and length of service. Unlike modern, account-based superannuation streams which have a changing account balance, these pensions are taxed as personal income;
b) CSS pensioners do not receive an Annual Member Statement with details of an account balance and have received no information on how Div 296 will be applied to their pensions;
c) There is no provision within the CSS for members to obtain a release of benefits as a lump sum on any grounds;
d) How will a member’s interest be valued to recognize their individual circumstances, including their life expectancy;
e) Neither the Commonwealth Superannuation Corporation nor the Commonwealth holds a member’s notional balance. In fact, unlike other employers, the Commonwealth has failed to establish a reserve to fund its liability for paying these pensions.
f) Because CSS pensions are not paid from a superannuation balance, they are not covered by the Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024. These regulations create a more flexible avenue for allocations from superannuation reserves but only apply to lifetime pensions, life-expectancy pensions and market-linked pensions, but not large Defined Benefit Funds such as the CSS).

Since the ‘Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulation 2024’ came into force, the Government has passed the Social Security (Waiver of Debts – Legacy Product Conversions) Specification 2025. This legislation waives any debt if a member commutes their legacy pension in line with the super laws. Unfortunately, because there is no balance, this legislation does not apply to CSS pensions.

Unlike the eligibility for aged pensions, the Better Targeted Superannuation Concessions Bill 2023 makes no allowance for couples where one spouse’s TSB exceeds $3 million and the other spouse has no superannuation. This means that the taxation burden often unfairly falls on a CSS pensioner.

Can anyone clarify the Taxation Arrangements for self funded CSS pensioners with a TSB greater than $3 million?

Because most CSS pensioners have other income, I estimate they currently pay about 27% of their pension in tax. For those CSS members whose TSBs exceed $3 million will they pay another 30% of their pension in tax?
For example, consider the Div 296 tax liability for a taxpayer with:
$1.8 million superannuation balance in pension mode.
Earnings: $1.8 million x 7% = $126,000. Tax@0% = $0.
$1.2 million in an accumulation account.
Earnings: $1.2 million x 7% = $84,000. Tax@15% = $12,600.
$960,000 notional defined benefit balance.
Pension $50,000. Tax@30% = $15,000.
TOTAL TAX ON SUPERANNUATION ACCOUNTS $27,600
PLUS PERSONAL INCOME TAX ON CSS PENSION $13,500

TOTAL TAX PAYABLE $41,100

Can anyone advise CSS pensioners whether the 30% tax rate applying to balances over $3 million will be in addition to the income tax already paid on their defined benefit pension? If so, is this a fair way to treat former public servants? Could CSS taxpayers be paying more tax on their pension (57%) than the highest rate of tax that applies to wage and salary earners (45%+2%)?

Good question Bruce

Treasury has had 2.5 years to come up with an answer but hasn’t explained as to how DB pensions will be taxed under the proposed new tax.

Indeed the legislation actually went through the House of Reps in 2024 and not one member asked this question during the debate. A senate enquiry asked and didn’t get an answer before the Senate rejected the legislation.

Anyway, the Government now claims it has a mandate to introduce a tax that it cannot explain as to how it applies across all types of pension funds.

Any CSS pension produces once transfer balance cap so the simple solution is take that contribution to the TBC and reduce TSB buy that amount. I have a trivial CSS pension on the basis of just five years in the public service throughout my working life. For that I carry approximately $350k imputed value towards my TBC. If the government intends not to Tax CSS pensions under division 296, then I should in principle not pay any division 296 tax until my TSB exceeds $3.350 Million.

Indexed Pensions which also include the CSS, PSS and the old Defence fund should still be in existence for Defence and Police, many of whom are broken members of society from their service protecting Australia and the populace. This is why you can write holistic feelgood articles on the evils of indexed funds which no longer exist for the worker. I retired in 2010 after 31.5 years' service with an indexed pension of $62,200 at the time. Now whilst that very same pension has increased due to the CPI over the years it has only matched inflation - it has the same buying power now as what it did 15 years ago. I have the pleasure of paying tax on that 'so called' generous indexed pension plus I have the added pleasure of not qualifying for any of the aged pension and all of it benefits thus saving the commonwealth well over $45,000. As for Politicians, executive members of the public service and members of the judiciary, us common folk think 3m is a lot of money (which it is) but it should be indexed. You should not change the goalposts. Afterall this is just another way to tax rich people who would not even miss it. But it should be indexed. Fancy politicians voting to tax themselves to pay more money Unheard of in modern society.

Defined benefits are ordinarily not an issue for the taxpayer in a period of low or no inflation.
The real problem with defined benefits is those senior public servants simply refuse to die.

There was a decision made in the early 1990’s to ban smoking indoors (at your desk) in the APS. This decision, combined with anti smoking programs, over time caused a steady fall in smoking rates, and a drop in the number of cigarettes smoked per day. It is much harder to smoke 40 cigarettes per day if you have to keep getting in and out of lifts to head outside the building.

The ultimate result is better health outcomes and longer life expectancy. That longer life expectancy more than any other reason, is why the bureaucrats underestimated the cost of the defined benefits schemes.

I think Craig above makes a good point: the problem of grossly excessive pensions for those at the top of the tree has arisen as a result of grossly excessive salary increases for the same privileged group.
Defined Benefits are usually calculated by reference to a 'benefit multiple', based on years of service, multiplied by 'Final Average Salary' or 'Highest Average Salary', typically over 3 years.
The eye watering increases in politicians and senior bureaucrats salaries over the past few decades have therefore flowed directly through to their defined benefit pensions, with equally eye watering results.
This has reached the point where senior bureaucrats, such as the disgraced Robodebt Heads of Department on $900k pa, are being paid pensions at an exorbitant level, way beyond anything that would have been contemplated when these schemes were set up.
It would be perfectly reasonable and quite simple to cap future increases in the salary used for benefit purposes above a certain level.
For the vast majority of public servants however the scheme is achieving what is was set up to do - the relatively higher cost of DB benefits is inherent in the design of such schemes designed to produce better outcomes for members.
Any increase in tax imposts for Accumulation or DC [Defined Contribution] funds however, should as a matter of equity, also be borne by members of DB funds.
This is not that hard to do - God created actuaries for a reason.

The statement refering to defined benefit CSS scheme as "... a tax-effective vehicle for intergenerational wealth transfers" is very wrong and misleading.
1) Tax is paid at full marginal rate. A 10% rebate applies, but only up to 100k PA (related to the 16 x reasonable benefit limit of original $1.6M). Above that NO rebate at all. So lets apply all these calculations to all workers wages (minus 10% for those below 100k)
2) There is no intergenerational wealth transfer after death, (only %60 pension to spouse). The fund has $0 value. So this statement is simply a lie!
Please get your facts correct!

Exactly right Peter. I’m surprised some so called financial analysts can’t understand these basics. It speaks volumes on their (in)ability to provide accurate advice.

Dear Jim and Peter

With great respect and please refrain from making derogatory remarks without disclosing your name and background.

If a DB pensioner is receiving a large annual pension which is well in excess of their reasonable financial needs or requirements, then that excess goes to savings.

As savings grow it goes into a living estate for transfer. It can accumulate till death or be dispersed during life.

As a person ages then their need for income actually declines because their discretionary expenditure declines with age. Maybe you observed this with your parents or from personal experience.

It is confronting for those in denial but it is not a lie. It is a reality.

So how many DB pensions in Australia are generating $300k per annum? Do they need that amount to maintain their lifestyle? Is that lifestyle reasonable to an ordinary Australian taxpayer? Should it be indexed by an inflation rate which is unconnected with their true cost of living.

Cheers

John, apologises for letting Jim's comments through. You're right, it isn't civil.

Peter

What statement are you quoting from and referring to?

It is not in this article.

Jim - what are you agreeing with?

I am confused

I interpreted the reference to intergenerational transfers in the context of "Would a 90 year old need $510k a year to live on?". i.e. that the generous payments will simply pile up, to be passed on to beneficiaries of the estate.

"Pension at 75 $327K. Pension at 95 $590K". Interest rate applied 3%.
Figure of 3% would be a very reasonable estimate of annual inflation
Therefore, $327K at 75 years equals $590K at 95 years.No true increase.

But equally ridiculous

The Defence fund (DFRDB) provided me of an indexed linked pension of 16K in 1999, albeit now 32K last FY. By itself not quite the retirement I had planned.

Had I have left Defence before becoming eligible for this pension my return would have been my contributions only. Unless I count a payment of approx $100 for each year of service.

It would have been wonderful to have received the same benefit as paid to our political masters. Alas it was not to be.

Thanks John

We can smell vested interest a mile off. You failed to mention that those high profile politicians, Defence force and High Court judges (off which there are perhaps a few thousand) pay tax at marginal tax rates which is well above what is proposed for the $3m club.
Also, they have no control over the asset value of those funds, unlike those in the $3m club who can remove their excess monies from super and invest elsewhere.

Even low pension income retired public servants pay tax at their marginal tax rate.

Perhaps what is need is an actuarial based approach whereby individual superannuation tax concessions cannot exceed the total value of foregone aged pension. I would expect many thousands would already lose all concessions under that approach.

Vested interest...to be sure.

As a lower level retired public servant, if my contributions plus government contributions had been paid into a super fund the amount with earnings would at 5% withdrawal rate pay almost twice the amount currently receiving under defined benefit scheme. The problem the government has now is that under the defined benefits scheme the government never paid theirs or members contributions into an account and used these contributions in budget outlays.

Did the author actually make his argument around a DB value that is indexed to inflation - presumably to account for inflation - and then question the DB value in 20 years time (510k) as if that amount is in today’s dollars??

Or have I misunderstood.

Thanks Steve

I have merely compounded the DB by an assumed 3% inflation.

Let’s remember that ATO PAYG tax rates are not indexed.

Also, the proposed $3m base for unrealised capital gains tax is not indexed as well.

Indexing for some but not others.

I take your point re inflation and today’s dollars. However, is it fair or reasonable for someone to receive or expect ( say) a $300k pension that is indexed for life?

Is it reasonable that taxpayers entering the workforce are now paying tax to pay these pensions that were never properly costed or negotiated?

A open discussion needs to had with pros and cons - facts and fiction - disclosed.

Disclaimer - I will receive an MSBS DB from 55 that is indexed for life.

It was part of the consideration to remain in the service on lower salary and far less agreeable work conditions, rather than pursuing more lucrative and ‘cushy’ work in the private sector.

I would say in that context it would be unfair to essentially renegotiate the employment conditions when the opportunity has passed to avail oneself to the more lucrative private sector.

Not sure how that position translates (if at all) to other DB schemes and work environments.

But to my query on the inflation values, I think as it reads the 510k seems alarmist, or perhaps chosen for impact. As you say, the query is better directed at a ‘300k pension indexed for life.’ Ie. Should someone expect the buying power of 300k in today’s $$ for life?

When I joined the Public service in 1986 my employment conditions were clear when it came to superannuation. I had to become a member of the Commonwealth Super Scheme and contribute 5% of my salary each fortnight - there were no other options. So by suggesting defined benefit pensions should be "reset" are you saying that it is ok to now move the goal posts because some of these pensions are too generous? Sounds like politics of envy to me. The real reason these pensions are so high is because of the huge salaries paid to these politicians and senior public servants now - the goal posts of the defined benefit schemes have not changed...yet.

I would not worry about the $3 million dollar base for unrealised gains not being indexed. I know it won’t stay at $3 million but will continue to rise.
How do I know this? Just look at the income tax thresholds. 30 odd years ago, the top marginal rate kicked in at $50,000 but today it kicks in st $190,000, yet these thresholds are not indexed.

Just as the income tax thresholds have increased over time, so will this $3 million dollar threshold.

The lower and middle classes will never reach that threshold, as it will increase over time (even if it is lower than CPI).

Lets call a spade a spade. If an individual has $3 million in super, or a couple have $6 million in super, they are wealthy.

They may not think of themselves as wealthy, because they surround themselves with other wealthy people and their base comparison is skewed. Make no mistake though, they are wealthy.

By the way, of the people with over $3 million in super, the average amount is $6 million.

I have little sympathy with these people bleating about paying a little extra tax. As almost all these people have reached a condition of release (65 years of age or 60 and retired), there is noting stopping them withdrawing the extra money.

Super was designed to.pay for your retirement, not as a low tax means of estate planning, which is what it has become for the high net worth population.

How about a comparison of the cost to consolidated revenue if all those on defined benefit pensions had instead been in accumulation funds (requiring the statutory employee annual contribution), noting that those in defined benefit schemes contribute a percentage of salary whilst working. And a comparison of the estimated benefits paid out to an employee in a defined benefit scheme vs a similarly paid employee in an accumulation fund.

Good question Graeme,

We have a Treasury Department which has now recommended a unrealised capital gains tax.

Surely they can review the cost and the lost opportunity to the Australian taxpayer of DBs v contributed super accounts.

Since 2005 the Commonwealth has run both type of funds. So can they report to the taxpayer as to what the difference ( $ costs) is and will be going forward?

Thanks for this article. It is the context that has been missing. The lack of transparency induced by self-interest is a real issue that is destroying trust in politicians. Chalmers, on the otherhand, is an inexperienced ideolog that doesn't understand the question, let alone able to provide a thoughtful answer. Being involved in the DIv 296 advocacy (for a better design) I must say, the loudest voice was from the Judges - have a listen tot he Senate Committee's proceedings. They can cut through for a host of reasons, non the least as reform for that cohort makes it potentially better for the pollies

The biggest issue is that the recipients of these bloated schemes have rights - which need their agreement to be removed. (I contrast that of the rest of us whose “rights” in superannuation are at the mercy of the government of the day or the Greens.)

When Australian businesses went through the painful process of changing their corporate defined benefit schemes to contribution schemes, this with similar rights” had to be bought out, usually by allocating a higher contribution balance than was the then assessed value of their pension.
Naturally, the public servants did not recommend that to the Government.
The change was assisted by the mobility of employees in the private sector. If an employee left, the calculation of their pension (final salary and years worked at the business) was frozen and it made commercial sense to take the payout figure. Indeed, some of those schemes required one to still be at the business on retirement to get anything. The new job would be offering only a contribution scheme.

We are now 20 years into the new contribution only scheme for public servants. Unfortunately few of them leave the warm comfort of that ivory tower.

I doubt many of the old cohort will be able to be persuaded to take the money and be like the rest of us - reliant on shares and bonds performing to give us a retirement income.

Cynical observer, all your points are reference to the effects of neoliberaism as felt by the individuals. What of the boomer who bought the house for $70000 now worth 1.4miliion should the gen Z complain, yes of course. Expensive pensions for the hoi polloi have to go but for our hatchet men aka politicians well that's another story.

as a person on a defined pension and still working, I joined the public service in 1997, the PSS was the scheme, we have contributed to it and stayed in the job, there are about 70,000 still working and about 305,000 in total.

What people need to remember is it was the government agreed to, they changed it in 2005, and gave the option to switch, but honestly why would you.

It would take a compensation payment of about $4.5m for me to even consider ceasing this scheme (tax free) they do that ( based on retiring at 55 on $130k pension and factoring in 2.8% indexation for life) - as that is what it will roughly be if I live to 87..

I am looking forward to retiring at 55/56, one of the perks of the scheme, you are correct we have rights and it is also a trust deed in the superannuation act, so can't be touched.. they tried in 2007 and advice was they would need to pay a huge amount of compensation.. talking several hundred billion..better to wait it out and see how many of us die first.

Maybe I am missing the point, but Chalmers Super Tax grab, is not even touching politicians on DB, mostly going after wealthier Australians with substantial super balances. If accumulated by saving wisely, or buying the right shares, or stuck some property or farm, in their SMSF, The legislation seems not to care. Also if it is not Indexed to inflation it is nasty work. The government are slow to index the Tax brackets for good reason, it makes them more money.
Disclaimer, I don't even have $500k in super, so I should cheer it on, but that is not what being a decent person is about is it? The super wealthy will move their funds out, and it will be the little guys who will get the charges in 10yrs, unless it is repealed.

So if "not Indexed to inflation it is nasty work" does that cover every income tax schedule ever?

I have not seen any significant change in income tax paid since I compiled an Excel Model from 1984 tax rates to 2025. It's always been a take-home for median wages of around 75% even though they have changed rates over the years. Even at double median the take home (Excl Medicare) is about 72%. If you didn't index it, then the government would be incentivised to run higher inflation and get more taxes, although if prices went up, that would not really reward them, but maybe they don't care.

how convenient, our super can't be stiffed around with at whim even thought contribution were made in good faith that the rules won't change BUT the pollies get their enshrined in parliament and can't be touched. one law for them , one for the rest