The public servants demanding $3m super tax exemption

In this article there is a reference to ACPSRO (Australian Council of Public Sector Retiree Organisations), who are seeking an exemption from the additional 15% tax (proposed as from 1 July 2025), on superannuation earnings for those with balances over $3 million.
Many ex-Commonwealth employees are receiving a Defined Benefit pension (DB pension) but do not have an actual sum involved - they receive a pension but, for example, do not have access to withdrawing lump sums when needed. They also pay the full marginal rate of income tax on the pensions they receive.
Note: These DB pensions I refer to are confined to the 1922, CSS and PSS schemes that were closed down in 1976, 1990 and 2005 respectively.
There is a complicated formula for calculating what might be regarded as a "superannuation balance” when comparing it to the notional figure of $3 million - basically, it involves multiplying the annual DB pension by 16 to arrive at such a figure.
Note: Since the introduction of this "16 times” in 2017 there have been several attempts to get the government to realise that this is fraught with many problems e.g. shouldn’t align a retiree aged 65 with one aged over 80 (different life spans). However, the government do not seem prepared to undertake a review of this matter.
As included in the article above, it would require a retiree to be in receipt of a DB pension in excess of $187,500 pa before they would be affected by this proposed Div. 296 tax. Hardly any of our members enjoy such a generous pension. The average pension for these schemes is only $45,109 - according to the latest annual report from the Commonwealth Superannuation Corporation (CSC), there is a total of 168,969 pensioners sharing $7,622,057,000. Note that the Centrelink Age pension for a couple is currently $43,753 (a difference of only $1,356 pa).
Note: Retired High Court Judges, some older federal politicians and retired government Departmental Heads would very likely be affected by this proposed Div. 296 tax, but none of them are members of SCOAWA.
There are other examples (not widely recognised), where the Commonwealth DB pensions do not compare favourably with those superannuation schemes available to the general community – Here [https://www.firstlinks.com.au/uploads/2024/documents/CSSPSS-Comparison-with-ABP-Superannuation-March-2024.pdf] is a summary that is relevant to this claim (DB pensions DO NOT compare favourably to the schemes that are available to the general community).
SCOAWA is the last remaining State Branch of a national organisation ("SCOA (Federal Council)" later "SCOA Australia"), that had its beginnings in 1923. Unfortunately, SCOA Australia closed down in 2019 after problems in attracting members to undertake executive positions - together with an ageing membership and low levels of recruitment. SCOAWA continues to lodge pre-budget submissions and is quite active in visiting federal politicians in an effort to improve the treatment of ex-Commonwealth employees. Although SCOAWA is not a member of ACPSRO we do correspond on a regular basis and, in most cases, share items that are being put to government.
I hope this information is helpful to Mr. Burshtein and other readers and that they might then have a better understanding of the conditions/restrictions applicable to a great number of retired ex-Commonwealth employees.
Thank you.
Ron de Gruchy OAM, President of the Superannuated Commonwealth Officers’ Association (WA) Inc. (SCOAWA)

Another example highlighting the complexity of our superannuation system. Patch upon patch to fix holes, making the system ridiculously complicated. Simplification and fairness would be better objectives than collection of a relatively small amount of tax.

"Simplification and fairness":

Abolition of super would be simple. Abolition of taxes on imaginary ('inflationary') gains would be fair.

Current super settings will neatly push the median incomer off the Age Pension:
= FV((1 + 6%) / (1 + 3%) - 1, (67 - 25), -12% * (1 - 15%), 0) * 2 * 65000
= $1,065,086

Where their real income is much less than with a full Age Pension:
= ((1 + 5%) / (1 + 3%) - 1) * 1065086
= $20,681

Abolition of Super is no longer Super. That amount of money coming back into the economy.

Massive inflation as too much money chases too few goods.

"That amount of money coming back into the economy.":

... is already in the economy.

When Costello introduced a TBC of $1.6m, he imposed income tax on DB pensioners (present and future) with commencing pension incomes exceeding $100k p.a. The pension was multiplied by 16 and the result reduced personal TBCs by a corresponding amount. Half of the pension's commencing value exceeding $100k became taxable at personal marginal rates. Why can't this approach be employed here? If it was, tax would apply on DB pensions greater than $3m divided by 16. i.e. Above $187.5k. So, if the initial pension (before indexation) was $200k p.a. personal income tax would be levied on $6.25k.

Now I know what a hornet's nest looks like. Great article Dimitri and comments from Jon K and John A.

I worked for 40 years at a quasi-government entity which had a funded DB scheme. When I joined there was a compact that because we were paid well below market rates we would get a decent pension when we retired. I believe that the government is now reneging on this compact with these tax proposals. I forwent higher wages and the tax benefits bestowed on contributors to accumulation schemes and now I am being punished for my loyalty and long service. My benefits will expire when I pass away and there will be no intergenerational wealth transfer. This is exactly the stated aim of the super system - to provide for retirement, not as a tax haven for money to pass to future generations.

Totally agree Greg! The defined pension schemes were indeed a sweetener for significantly lower paying government jobs - reneging on these promises is a both completely unfair and shows the sovereign risks that are running high in this country.

In addition these pensions are already taxed, unlike other superannuation retirement benefits and this is not mentioned in this article at all.

There are a few comments which suggest it is unclear what lump sum corresponds to a given level of defined benefit. Look in your online ATO account via myGov, under Super you will find current and historical details for 'Total superannuation balance' and 'Transfer balance cap'. Both show a lump sum that corresponds to your defined benefit. The lump sum is your defined benefit annual pension multiplied by 16 at a point in time. An individual with only defined benefit super would need a defined benefit annual pension of greater than $187500 before breaching the notional lump sum of $3M. Perhaps those on a defined benefit annual pension of greater than $187500 should pay more tax.

Ok Graeme - more than which particular tax should they be paying? On a $187500 taxable pension they are already paying tax at the top marginal rate less the 10% offset. Anything over $120000 is still on the second highest marginal tax rate before the 10% offset. So they are likely already paying more tax than someone who is going to have to pay 30% tax only on the part of their super balance over $3m, and also without the benefit of their heirs getting one cent of that notional $3m when they die... The big issue is the poorly thought out $3m idea.

What an extraordinary self-interest comment section. John is 100% correct in that the DB recipients should NOT get any concessions that ordinary mum and dads get via DC fund and then ABP eventually receive.

It has to be a fair playing field. BAD LUCK if you're assessed above the $3M threshold given you clearly also have the propensity to pay extra tax (rather than just don't want to).

Jim's decision to tax unrealised CGT is what you should be bickering about given its poor precedents. Its counter intuitive to how investments are undertaken and the policy developers we clearly just targeting a certain demographic.

Dear Denial, I won't comment on the DB Scheme or otherwise, with neither my husband or I being part of it, merely self-funded retirees -- however, we agree with your comment about the decision to tax unrealised CGT which is amoral, making Australia the second, I think, country in the world to do this. Being an SMSF primarily invested in Australian equities, we are happy to take the up and down years, be with Australian companies we know and be in for the long haul. We've already had to revalue our long term holdings once, in some cases hugely upwards. What will happen if there is a major correction (due who knows when) and we suffer "on paper" losses.....is that accounted for as well and netted off against other years, very much doubt it. Of more concern, is the younger people trying to get ahead and prepare for their own future who will be caught in this, even through bracket creep. And, what about industry funds, I have read that there is much grey area there over how valuations are/and will be, done to apply this scenario! This applies especially to unlisted assets and even LIC's.

Except many DB schemes have receipts paying tax at marginal rates already. This 15% would see marginal rates of 60% (before Medicare) on earnings above $187.5kp.a.

Is that reasonable? Is it reasonable in 10 years when not indexed and it applies to a much lower equivalent income?

Is it relevant for military/other invalidity recipients who are unable to work and earn extra earnings to offset the higher tax rates?

Point is that this is anything but well considered.

Hi Denial - indeed pensioners on these defined benefit pensions already get a lot less concessions than 'ordinary mum and dads get via DC fund and then ABP eventually receive', as the defined benefit pensions are taxed at the members marginal tax rate less an offset.

Would a level playing field in your eyes look like these pensions receiving the same tax concessions as other superannuation retirement income products? Aka defined benefit pensioners paying a lot less tax??

The pensions are also not a level playing field in that members had to contribute up to 10% of there post tax income as their contribution to the pension. This is different to normal superannuation where you can contribute from your pre-tax dollars.

Would a level playing field in your eyes look like members of defined benefit schemes being able to make their member contributions from pre-tax dollars rather than post tax dollars??

Excellent coverage, thankyou.

100% agree that governments should look at how much of our money they waste before complaining that they are somehow incurring an expense by not collecting more from us!

Thanks for all the comments.

My objective in writing this piece was not as an assault on defined benefit superannuants. Or the vast majority of them. It was two fold.

To highlight the absolute mess this poorly thought out tax policy will create - and that it will likely cost more to implement and maintain that it will generate. For those unfamiliar with FATCA - look it up. Then of course is the constant regulatory tinkering with defined contribution superannuation schemes but never defined benefit schemes.

The other objective was to bring to light the glaring, undisclosed, and generally undiscussed conflict of interest of our senior politicians (on both sides) and senior public servants - who are broadly insulated from the consequences of their decisions. Why be concerned about inflation when your pension is inflation indexed ? Why be concerned with public debt when your pension is guaranteed? Not to mention all the retired politicians and public servants on these generous defined benefit pensions who are concurrently working as lobbyists and consultants to government.

It's not sunlight that is required here but giant spotlights.

And please don't start me on the Future Fund either. You can read my writings on the matter in The Australian, the Australian Financial Review, and a research paper I wrote for the Centre for Independent Studies (CIS).

Let the debate being.

Commonwealth defined benefits super payments are subject to normal taxation as they are unfunded in super terms. There is a small tax offset because a small part is assumed to be funded through self contributions. Hard to see how the Commonwealth could claim more tax from these beneficiaries who are paying (almost) normal PAYG.Some State defined benefits payments are fully funded and pay no tax. They might be the target. Do readers agree with the above or have more information?

Dennis

I am interested in your comments.

Do your comments apply to the Public Servant Super Scheme recipients ( 2004 closed fund) - which will include at least 6 sitting current members of Parliament ?

There are many different schemes - as Dimitri notes - and this is not an attack on them per se.

It seems there is a deliberate strategy to muddy the waters and to hide the benefits that are flowing to a few high profile - current and retired - politicians.

Comments regarding what are fairer defined “ contributory” benefit schemes are not relevant to past schemes which had no contributions.

I also understand that most defined benefit schemes have a $100k tax free level before marginal rates come into play.

This matter needs to make it into the main-stream media. Otherwise the pollies , public servants, treasury and other beneficiaries of excessive schemes will try to brazen it out : because few people know or equating to normal super rules is too complicated, any and every excuse They are both judge and jury and already lobbying for exemptions

General public won't care. Majority are not impacted.

Same with the $3M TSB. So few are immediately impacted, there is little uproar.

Dimitri's point is well made. Politicians and public servants need to be in the same boat as the rest of us to ensure changes made impact all or none!

Hi Dimitri,

I enjoyed your article.

Given many of these defined benefit schemes required members to contribute up to 10% of their post-tax salary (no salary sacrifice benefits) to the scheme as their member contribution and pensions from these schemes are taxed at the members marginal tax rate (less an offset), how do you think this should alter these scheme's treatment under the $3m total super balance tax?

Looking forward to your response.

Thanks,
Dylan.

Some people seem to have a problem with DB schemes.
These schemes existed prior to Keating's universal super.
When I joined a state PS, I had it explained as they had two start dates per year, and I wouldn't have to contribute until the next one started.
Up until five years I would get my money back if I left.
After five years I would start to get some interest.
I think there were some other amounts paid after times, but don't remember them now.
The government was supposed to be also making contributions, but as the turnover of staff, within those five years they didn't contribute anything.
Keating couldn't close these schemes because the government would have had to pay their outstanding contributions into the universal scheme. They were already going to have to start paying super for all new staff, let alone their, then current, debt to the existing DB scheme.

DB pensions don't have a residual value, so they are not for everyone.

Justice comes to bludger politicians creating their own self serving no contribution pension fund.
Let them eat cake,

In previous times, Defined Benefit Pensions (DBP) were the norm, but usually only available to senior executives. Ordinary workers expected the age pension - which delivers its own predictable income stream. As the DBP is a function of the years of employment, it was also a way of rewarding loyal and distinguished service. The DBP was, and remains, a condition of employment, not a wealth accumulation exercise.

But retirement embodies many risks. These risks include longevity risk, market risk and inflation risk. With a DBP, all those risks are managed by the provider not the retiree. That’s what makes them so appealing to retirees and so expensive for the provider. As retirees live longer, that liability for the provider simply expands.

As a consequence, most DBP schemes have been closed to new members, and responsibility for managing those retirement risk has been transferred to retirees themselves. Super is now an exercise in wealth accumulation that is encouraged with a range of tax concessions, to reduce the cost of the age pension. At retirement we now expect retirees to take this accumulated wealth, the size of a lottery win, and manage their own retirement of uncertain length and complexity.

For many retirees, this super wealth is more than they ever expected to accumulate, but managing complex retirement risks is beyond the abilities of even some professionals. As retirees accumulate more super, that challenge becomes more urgent.

Of course, retirees can take their accumulated wealth and buy a Defined Benefit Pension. It’s called an annuity and, for a fee, transfers all those risks back to the provider.

That fact that annuities are not popular suggests that most retirees prefer discretion over how and when they dispose of their wealth. I know I do, but if the income provided by the DBP was generous enough, I might be persuaded.

What about the people that convert their lump sum into a DBP, then die shortly after retirement. The government has a huge win.

A case study for a 100% inheritance tax on unused super balances at death. I’d rather be taxed when I’m dead that when working or retired.

Thanks Dimitri

Amazing number of comments which shows that there are a lot of issues to consider regarding Defined Benefit Schemes. In particular it seems that there are a number of different schemes set up in different eras, with different beneficiaries, different rules and different benefits. Is its possible that someone ( an expert) can put in a concise report what Government schemes exist and for what cohorts? That would be good for First Links to be at the forefront of given the tax debate regarding super and particularly self directed retirees.

I have gleaned some startling observations from reading Dimitris commentary and subscriber points. The Federal Budget is paying (ie we the taxpayer ) about $19 billion this year for Commonwealth Defined Benefit pensions. I have never seen this figure published before. That is enormous and I wonder as to why the Future Fund is not paying this? What is the assessed liability for Australian taxpayers? Is it compounding with inflation?

Also, what is the Fund that the PM and Opposition Leader are beneficiaries of? If that Fund is now closed to new members then why did that occur? I presume the benefits were too excessive for the tax payer to bare and it had to be closed. Why is this a secret?

Finally, why cannot all super and pension funds be standardized? Why are all these different funds with different benefits and contribution rules? The comments I have read are full of personal statements of how changes may affect an individual but they are not consistent. There are clearly too many variations of and inside schemes that make a informed discussion difficult to have.

The Prime Minister and Opposition Leader are members of the Parliamentary Contributary Supperannuation Scheme which was set up by an Act of Parliament in 1948.
It was never a secret.
It closed in 2004, because the Labor opposition promised to curtail politicians benefits (if elected). The Liberal Party, which had let the scheme run for years, reluctantly agreed.

Thanks John

I take your point that it may not be a secret - but it is not common knowledge and not openly discussed in the public domain.

So the Parliamentary Scheme closed 20 years ago. I presume it was (and is) highly beneficial to the beneficiaries. What type of benefits are received? Can recipients (ex pollies) access the benefits (pensions) before they are at retirement age? I the pension indexed? Is there a tax free element on receipt? What proportion of the $19 billion expended in the budget does the Parliamentary Scheme represent? Finally, how do these benefits fit into the the unfunded liabilities to be paid by the Future Fund?

We are comparing apples with onions here. To get more than $3m in your SMSF requires large dollops of after-tax contributions because SG contributions won’t be enough. A SMSF is tax exempt up to $1.9million and 15% above that, but withdrawals are tax exempt in the hands of the retiree.

This new tax applies to the fund’s income plus the increase in market value of the fund’s assets, (above $3) from year to year but has no tax refund for a fall in market value. Any residual value on death must be cashed out and may be subject to a death tax payable by beneficiaries.

A defined benefits pension (DBP) requires no personal contribution above the mandatory 5% and that can be salary sacrificed. But the pension is not derived from invested assets. Unlike pensions paid to retired QLD public servants, it is only a promise from the Commonwealth Government to continue paying an income regardless of market conditions until death, paid out of current taxation revenue. A DBP has no market value. It is equivalent to continuing employment (but no need to go to work) on half pay.

Therefore, a DBP has no lump sums and no residual value after the death of the surviving spouse. The defined benefit pension income itself is subject to normal personal marginal tax rates with a rebate of 10%.

So how do we compare the two? What level of taxable income from a DBP with no asset value is equivalent to an SMSF with an asset value of more than $3m that does not produce any personal taxable income when those assets are comprised of mainly after-tax contributions, and the whole fund balance (capital plus income) is available for withdrawal, tax-free, at any time?

Hi Jon
There may be no exact equivalent but the new $3M threshold and all the figures in superannuation are arbitrary to begin with and then become legislated. Reasonable arbitrary figures should be derived by non-vested interests for DBPs to put people on an equal basis and end the run-away disaster of indexed DBPs

Hiya John ,the obvious question here would be,what would Tony Abbott do. Choose the apple or the onion to munch on. :-)

I'm still on that exercise high,full of adrenaline/ endorphins or whatever it is.

These are valid points Jon.
DBP has nothing to do with use of super for wealth accumulation beyond legitimate needs in retirement.
No capital to draw or leave upon death with DBP.
Income received under DBP is taxed at marginal rates.
Income in super in retirement is either not taxed at all or at rates much less than marginal rates.
As you say, apples with onions.

I’ve never heard anyone saying the current system isn’t fair.
On that basis, adding 15% tax to all wealthier superannuates seems fair.
Maybe an option is to allow DBP members to switch to an asset based balance like everyone else.
That would test whether people think it’s unfair to also add the new tax to DBPs.

Easy.
If I could I’d most likely have a fat basically risk free indexed Government underwritten DBP instead of an equivalently fat SMSF.
Take a poll.

So why can’t I take money out of my SMSF to buy into the age pension scheme. It is indexed to inflation, unaffected by market volatility and paid for life.
It is a DBP!

Hi Jon - members of many of these schemes must make a post tax (not salary sacrificed) contribution to the scheme to make the pension anywhere near worthwhile. This is typically 10% of a members post tax salary!!! This consumes a significant sum of a members disposable income and could be equivalent of a normal super scheme member being required to contribute 17% of their pre-tax dollars to super!!

Pensions from these schemes are discussing are usually taxed - which is significantly different to standard superannuation pension payments which are usually tax free. This tax is applied at the members marginal tax rate, less a tax offset.

Excellent article Dimitri, and apt comments John Abernathy.

The Federal Government should pay out NOW each Defined Benefit Pension (DBP) Beneficiary a one off capital sum paid directly into a Super scheme of their choice. That way everyone will be treated equally going forward (even though DBP Beneficiaries have been receiving many many multiples of the money, plus investment returns, that they have contributed over their working lives). BUT such one off capital sums should be capped at say $6m (TBD) as some DBP Beneficiaries would receive simply massive numbers given that they are already receiving, in some cases, inflation indexed Defined Benefits Pensions exceeding $750,000 pa.

This is a huge issue that needs attention now before it ultimately sinks the nation as so many of these DBPs are unfunded and are paid out of the Federal Government’s General Revenue each year.

Many DBP Beneficiaries will, in fact, earn more in retirement than they ever did in their working lives, even allowing for Inflation. And that DBP grows each year as they age so that they are literally earning massive DBPs when they are in the final years of their life and their expenditures are small. That is a massive generational transfer if ever their was one AND the Beneficiaries of that DBP Beneficiary’s Estate then receive a huge tax payer funded inheritance in the form of the compounding “not spent” DBP and its’ investment returns.

Military DBPs should be exempt as putting your life on the line for your country is fundamentally different than working for a living.

And let’s not forget in all this that many DBP Beneficiaries have also “double dipped” by opening Superannuation funds as well, which they are allowed to do.

And that the proposed new 15% additional tax on Superannuation is on UNREALISED Capital Gains which makes it incredibly difficult for Superannuants to manage their Super capital and income given that they are forced to sell assets regularly to pay this new tax. If it was a straight 30% tax on income and say 20% on capital gains on the portion of balances above $3m it would be more manageable.

And perhaps most importantly, as this new tax is being imposed on Superannuants without being grandfathered or indexed, it opens up DBP Beneficiaries to the same treatment. That is, changed arrangements in retirement when one is severely restricted in how to adapt to significantly changed retirement income arrangements that one has planned around (and paid tax annually on) for 40+ years.

‘The Federal Government should pay out NOW each Defined Benefit Pension (DBP) Beneficiary a one off capital sum paid directly into a Super scheme of their choice. That way everyone will be treated equally going forward…’

Except they won’t be treated equally, not unless you are proposing to retrospectively compensate them for receiving lower salaries during the course of their working lives (so over ~30 years). This is the point non-DB superannuation members conveniently overlook. If you ‘pay out’ a capital sum based on notional employer contributions and members’ personal contributions, which is presumably how the total amount would be calculated in that scenario, you would not just be tweaking generous tax concessions at the upper end (which is the intent of Div 296), you would be retrospectively reducing their overall remuneration package.

As Bruce stated below, ‘Defined Benefit Superannuation, such as the Commonwealth Superannuation Scheme (CSS), was offered as an alternative to paying Public Servants market rates for their work and as an incentive to retain talented professionals within the Public Service.’ In other words, those in the public sector and military were offered a trade-off between more pay now (while working) or greater security in retirement. So any payout would need to compensate for this alternative being taken away—an impossible task to accomplish fairly and reasonably when entire careers have been determined based on this employee value proposition.

And as I’m sure you are well aware, the vast majority of DB pensioners receive nowhere near the extreme examples cited above that have been cherry-picked (if true at all)—I would love to know how many rank and file public servants are on $750k p.a. pensions.

‘This is a huge issue that needs attention now before it ultimately sinks the nation as so many of these DBPs are unfunded and are paid out of the Federal Government’s General Revenue each year.’

Except it won’t ’sink the nation’ since that is precisely why the Future Fund was established, to cover those liabilities.

I agree that the original justification for this generous DBP scheme was compensation for the lower salaries available in the public sector compared to the private sector. But public sector unions have worked assiduously to remove that pay gap, and Labor governments are happy to use public sector wages to lead wage rises.
On top of that, the final salary in the public service is the key variable in determining the pension payable in retirement. That explains the enormous liability these pensions represent to the Commonwealth and the Future fund will be insufficient to meet that liability.

Hi Derek

You should update yourself on the statements by the retired Chairman of the FF and its designer - Peter Costello.

He does not believe that the FF should ever meet the DB liability. It should be preserved as a perpetual fund for with some unknown purpose! True story.

Also, let’s be clear that there are a range of DB funds with the pre 2005 versions and those for retired Judges the most offensive to fairness and fiscal servicing capacity.

There is too much muddying if the issues by pointing to the reasonable DB fund benefits of recently retired Public servants to defend the benefits of those who have landed in the pre 2005 versions.

My interest is in the the old schemes whose beneficiaries was lyrical about the need for superannuation changes and taxes but whom will never have to endure their proposed changes. Offensive hypocrisy.

Yes we urgently need full disclosures of all the facts and all the benefits accruing across the different schemes. If they were fair than the disclosure would be forthcoming.

I agree with Dimitri’s view that Treasury seems more focussed on revenue raising than curtailing recurrent expenditure or achieving savings by reducing other programs. Moreover, Australia’s superannuation funds provide an important source of investment funding for start-up companies, major infrastructure projects and residential real estate. Over time the unindexed $3m cap will limit this pool of savings because people with surplus funds will modify their behaviour to spend rather than save.
Defined Benefit Superannuation and Defined Contribution Superannuation are like comparing apples to oranges. One is a benefit in respect of previous employment while the other is based on contributions by the member and their employer. Defined Benefit Superannuation, such as the Commonwealth Superannuation Scheme (CSS), was offered as an alternative to paying Public Servants market rates for their work and as an incentive to retain talented professionals within the Public Service.
Treasury now faces a difficult task trying to apply the same conditions to these widely different schemes. In the case of the CSS, its provisions in the Superannuation Act 1976, have not been updated for almost 50 years.
When TSB caps were introduced in 2017 the Government calculated a notional balance for Defined Benefit Superannuation based on a member’s salary, years of service and age. However, unlike other superannuation schemes, these notional balances have not changed and bear little relationship to the amount to be paid to an individual as a pension until they, or their spouse, dies. In theory, the notional balance should decline as a member ages, or their health deteriorates. For example, I have a heart condition and my wife has stage four rectal cancer. While my notional balance is $700,000 we are unlikely to live more than five years, and receive $275,000 in pension payments.
If the Government is to proceed to implement a cap on superannuation balances, the only fair way is to allow all members of Defined Benefit Superannuation to transfer their current balance to another fund. The Government has the legislative authority to close the CSS and allow members to transfer their notional balances to another fund because the Future Fund Act requires the Commonwealth to discharge unfunded superannuation liabilities once the balance of the Future Fund is greater than, or equal to, the Target Asset Level necessary to fund Commonwealth superannuation liabilities. As of December 2023, the value of the Future Fund exceeded the Target Asset Level by $50 billion.
For those who claim that Defined Benefit pensions are significantly superior to Defined Contribution Funds they may not be aware that the indexation formula used for determining increases in CSS pensions has meant that the past 10 years CSS pensions have increased by 27% while the Aged Pension for a single person has increased by 37%.
CSS pensions are taxed at marginal rates (30-40%). But members of other superannuation funds such as Industry Funds, Retail Funds and SMSFs whose balances were less than $1.6 million when they commenced their pension, receive a tax free income and franking credits.
CSS members cannot transfer their balance to a better performing Industry Super Fund, or withdraw a portion of it to cover major medical expenses, pay off a mortgage, or offer financial support to their children. Neither can they reduce their TSB to qualify for a partial age pension.
Members also cannot transfer part of their balance or have pension payments split to provide financial independence for their spouse, unless they divorce. The Superannuation Industry (Supervision) Act 1993, which neither allows the splitting of defined benefit pensions or transferring a balance to another superannuation fund, has not been updated for over 30 years.
There is no Australian Prudential Regulation Authority performance test for Defined Benefit Funds. APRA could ensure that the notional balances accurately reflected the amount of pension to be paid during the lifetime of a member and that the Scheme is consistent with benefits available to members of other superannuation schemes.
The draft Better Targeted Superannuation Concessions Bill 2023 excludes the CSS from paying any additional tax on behalf of members currently receiving a pension. Given that CSS pensions are already taxed at marginal rates, the additional 30% tax will increase this to over 60% of a Defined Benefit pension payment.

Whilst this is an interesting article it does lack a lot of factual details around the Defined Benefit pensions schemes being discussed and it is important this facts are properly captured for the article to be viewed through a balanced lens.

Firstly members of these schemes make a post tax (aka after tax) contribution to the scheme to make the pension anywhere near worthwhile. This is typically 10% of a members post tax salary!!! This consumes a significant sum of a members disposable income and could be equivalent of a normal super scheme member being required to contribute 17% of their pre-tax dollars to super!!

Secondly the Defined Benefit pensions you are discussing are usually taxed - which is significantly different to standard superannuation pension payments which are usually tax free.

Given these two important differences it does seem as though Defined Benefit pension schemes should be valued differently to normal superannuation under the $3m tax proposal being put forward by the government.

"This is typically 10% of a members post tax salary"

Actually 5%! Unless the member CHOSE to contribute more!

"Secondly the Defined Benefit pensions you are discussing are usually taxed - which is significantly different to standard superannuation pension payments which are usually tax free."

But with a 10% tax rebate on the gross sum paid, so unless a huge pension, little or no tax payable.

My father had a SA Super DB pension that my surviving mother get 2/3 rds of for life. They are very generous schemes that the tax payer can ill afford.

Almost everyone with a DB, CHOSE to contribute 10% POST tax salary into their super. It was a big chunk of money out of salaries for those, who like everyone else, was trying to pay off mortgages when interest rates were 18%!! The Super offering was the lure to work in the Public Service (compensating for many short comings of the job) AND many of those workers contributed to that super for 40 (FORTY) years. You don't get 40 years for murder in this country! The article does make any mention of such a commitment those with DBs made over their entire lives.. Additionally, those on DBs cannot simply withdraw lump sums to stay under the $3M limit, as others can. There is a LOT of missing and very relevant perspective in the original article - unfairly painting DB recipients as villains.

‘ there were 41,000 retired Commonwealth public servants receiving pensions of greater than $75,000 per annum. The average net present value of these accounts was $3.4 million’

Curiously this article neglects to mention that the majority of a typical government defined benefit pension is assessable income and subject to the recipient’s full marginal rate. Only the component relating to the member’s after tax contributions is tax free. So in the above quote, those public servants will not be enjoying the full $75,000 (as implied), which also makes one wonder if the $3.4 million NPV is relevant or fair in context.

The other overlooked point is that a DB pension in government and military service was part of the compact between the government and public servants / ADF for not being remunerated as highly as equivalent private sector jobs during the course of their career and retaining staff—hence ‘golden handcuffs’. One wonders if those calling for equivalent treatment now would be in favour of DB members and pensioners being given back pay to make up the difference to compensate for the loss of the DB pension.

All in all, quite a disappointing read—almost as though it may have been designed to mislead a gullible readership.

Hi Derek

You are doing it again in this comment. Mixing the post 2005 DB schemes with the pre ones.

However, there are significant tax benefits across all schemes . The pure non contributory funds and the beneficiaries ( present and future) of same are the offensive funds with the worst compounding liability for tax payers.

Just remember - the funds were closed to new members ( ex defence) in 2005 with the liability to be identified ( by actuary) and funded from the FF from 2020. History now shows that the FF is hopelessly underfunded and the estimated liabilities - which you seem to want defend- totally misrepresented to the public.

Hi John

I’m unsure what you mean by the post-2005 DB schemes? I was referring to the old CSS/PSS schemes (which closed in 1990/2005) and State Govt equivalents. Most recently retired public servants would generally belong to one of those older schemes, which required a high level of consistent post-tax member contributions to derive a decent pension, rather than any post-2005 schemes. I also wasn’t referring to judges, etc. The original article didn’t seem to really distinguish between them either.

As for Peter Costello, as you say he is retired and would not have much say over how the FF should be used in future. The legislation and government of the day are what matters. The main point was these are not totally unfunded liabilities that will ‘sink the nation’ as in another post.

I also am not disputing DB schemes being covered, just trying to balance the hyperbole and misinformation in many of these posts. How the equivalent threshold is calculated to account for the inherent differences between DB and accumulation schemes is the real challenge. As Neil B. says below, the whole issue is more nuanced than most seem to believe.

I am a paramedic with 33 years service in a government ambulance service and my wife is a hospital nurse.....

We are in these schemes....what's your take on that folks? My mates and I have worked shift for years, dealt with the worst society can throw at us and now the majority of commenters are happy to short change us.
These are attraction and retention benefits. My accumulated skill set has saved Iives. I gather from the commentary they are worthless.

Yes I think that is the message coming your way.

There are a few points about DB pensions not included in Mr Burshtein’s article including:

1) DB pensions are taxed as normal income and don’t receive the concessions targeted by the legislation

2) there is a 33% death tax on transfers to a spouse and 100% death tax on the spouses death or where there is no spouse..

3) all those on DB pensioners doing extra work don’t get the $18,200 tax free amount and pay the full marginal tax rate on all other income received.

4) That there is zero to bequest to a DB pensioner’s estate.

5) operating an unfunded superannuation scheme is actually cheap credit for government.

6) while they may be indexed, the rate of indexation is well below the rate of return received on a super fund..

Hi John

I must comment on some of your points.

First, DB are taxed but not at normal tax rates. There receive significant tax benefits not consistent PAYG rates. There is a tax free threshold depending on the type of DB scheme a beneficiary is a member of. The pre 2005 schemes are embarrassing beneficial.

Second, there are no death taxes on transfers. Benefits reduced to a transferred beneficiary ( eg. A widow). A 100% death tax. Really?

And third , operating an unfunded superannuation scheme is cheaper credit for a government. Please have a look a the targeted asset amount for the Future Fund when it was set up in 2005. The actuary forecast that about $140 billion was required by 2020 to meet the DB liabilities was profoundly incorrect. Today the FF has $220 billion and is still underfunded by at least $50 billion.

John I now receive a PSS defined benefit but not in the >$75K bracket. I worked for 18 yrs under this system. If I die first my wife gets 67% of my existing pension. When she dies our estate gets nothing (unlike contributory schemes). If she has pre-deceased me the estate still gets nothing. So yes John Pauley is correct with his 2nd point regarding death taxes. With respect to my 18 yrs of work under the PSS:- a) My understanding (and happy to be shown incorrect by someone in Treasury) is that the govt did not "contribute" any money over the 18 years, unlike a normal business that physically puts the money into the persons account. The govt is only now contributing their share in my retirement years. Saying the scheme is unfunded is a little misleading. b) my 10% salary contributions were made from already marginally taxed income - this portion of my pension is tax free now. However, and its a big however , the (majority) portion of my pension is from govt "notional contributions" which are taxed at my marginal rate , and I do get a 10% rebate on this, but this does not cover the tax due. c) If I had moved to another place of work, there were financially punitive ramifications which only people in the know would understand. The "golden handcuff" was real. I am not complaining but salaries were much lower under PSS than my previous employment in the private sector and flexibility was non-existent. The whole issue is very nuanced.

I question the figures. 41,000 above $75,000 per year as having calculated value over $3,000,000. I know that after the $1,600,000 cap was applied to NSW DB scheme it was at a multiplier of 16. Only people who's yearly Pension was over $100,000 p.a. had to pay tax on the amount above $100,000. Does this mean that there is a different value of Federal DB? If a multiplier of 16 is correct then only those getting above $187,500 would have a problem. When averages are quoted, then I generally believe there is something being hidden.

I say to Retired Service person and all defined benefit receivers that Super Rues are supposed to be universal and fair so if your balance exceeds the $3million that's what the rules say and you just have to suck it up and pay your tax like any Superannuant with over $3m would have to do.
No special sweetheart deals.
We could all find some reason why we shouldn't pay x y or z tax but that's not how fair taxes are supposed to work!
Like John suggests - pay out these Defined Benefit Public pensions like most private sector companies did and transfer them to accumulation funds so the future annual drain on the public purse is cut off.

You may have missed some of the nuance in the comment - there is no issue with paying tax on a benefit as required by legislation.
The issue is in the apparent desire by some to ‘payout’ DBs in total.
It amounts to saying: yes your total package for your service rendered was X but we are retrospectively going to change it to Y, even though we’ve got the service out of you that we agreed we would pay you X for - sorry.
‘Comparison is the thief of joy’ seems apposite. Many Aussies could have secured themselves a DB if they served - but most didn’t.

RSP, you make a very valid point. However, the government(s) of today are inevitably burdened by the decisions of governments of yester-years, which are often not suited to the unpredictable current world. So they must either become extremely creative in devising solutions to mounting demands on our social and global conditions, OR consider moving the (no-longer-appropriate or “different game”) goal posts.
For either option, they will always be criticised.

I'll wager that DB Super schemes will be exempted because of the "difficulty" in assigning a value to an individual's entitlement and the fact that you never bet against a horse called Self Interest!

Note to Dimitri - Tell him he's dreaming!

I receive a defined benefit pension courtesy of many years of military service including active service.
Various calls in the comments here to payout and cease DB entitlements are quite disappointing. The DB that came with service was part of the value proposition of service - many service people continue their time in service well beyond the use by date (often to their detriment) to secure a sound future income.
Military DBs are earned through service - those seeking to make us all equal miss a fundamental point… we are not equal.

You are correct RSP about a defined benefit being part of the package. But chances are, unless your pension is more than $75K pa, you won't be affected.

But the compulsory transfer of income to superannuation being subject to a concessional tax rate was also part of the "package" for everyone else to.

There is a simple solution to this. The government withdraw this terrible policy.

The extra tax only kicks in when the capital value exceeds $3M.

Dimitri

Great article

The whole issue of defined benefit pension schemes and the presumption that the public liability is covered by the Future Fund is looking like the greatest co-ordinated cover up in politics today.

Not one main stream journalist dares ask the Government and Treasury what the actual and expected liability/cost of the defined benefits that have been gifted across this country. Is the Future Fund ever going to cover the Commonwealth liability? Is the FF going to pay the pensions as it was set up to do? Are the various state schemes ever likely to be funded?

No one in the Press Gallery questions as to why the Prime Minister, the Opposition Leader and numerous other sitting members do not disclose their interests and their benefits to Parliament, ( in real $ terms), when they debate super policy in Parliament. Arguably they have a conflict of interest which should be disclosed.

When ex politicians ( think Costello, Combert and Swan) sprout their opinions on superannuation - why are not they compelled to disclose their gifted benefits?

These are terrible positions to observe and conflicts of interest are so extreme that they cannot be dealt with by anyone who has a vested interest in maintaining defined benefits.

I don’t have a vested interest and so I propose a simple solution. Calculate a once off payment for each beneficiary that can be funded from the public purse ( the Future Fund and maybe a one off bond issue) and be done with the whole cancerous legacy of a past era of poor policy. Stop trying to treat it. Eliminate it.

When the calculation is done - based on standard rules of fairness which apply to all beneficiaries - it will be interesting to see how the numbers land. Indeed, I suspect the values will be very embarrassing for a number of high profile people - the quoted $19 billion pa payout by the Commonwealth underlies how bad the fiscal position is. And as Dimitri notes it is indexing ( compounding) at a frightening rate.

There are a number of inconsistencies with how parliament and the private sector works. Reflecting on a a recent well-publicised court case, how long has it been since well-governed private sector enterprises outlawed alcohol on their premises? Why is this still acceptable in Canberra?

Points to a general leadership issue - you don't get any respect from the shop floor (eg. voters) if your fat cats in the office (eg. parliamentarians) are allowed to live by different rules. Who is going to be the "brave" politician that puts a values-driven proposal like this in their next election manifesto?

Don't forget John, that members of these schemes have been required to contribute 10% of their post-tax salary to make the pensions work. This income that is being paid into the scheme has already been taxed at the members marginal tax rate - this is very different to normal super that is concessionally taxed at 15%.

It should also be noted that pensions from these schemes are subject to tax, sometimes with a concession, which is very different to normal superannuation pensions that are usually entirely tax free.

Given the increased tax on contributions to these schemes (at the members marginal tax rate) and the tax on pensions, there is very good argument to be made that they should be treated differently under these rules.

There is of course a very simple solution that has been used by Australian Corporations for decades - close down the Defined Benefit Schemes and pay out the beneficiaries using the Future Fund. Every Australian retiree or prospective retiree, is then on exactly the same footing.

Because it is simple and equitable, has no chance in Canberra!

I was once in a corporate defined benefit fund. They had no converting it to a lump sum and putting it in a contribution based account.

Sounds like a good idea to me. lets do it

This is just another of the never ending 'snout-in-the-trough' tactics that this labour government keeps on getting away with. Anyone that has worked hard and scrimped to build a retirement fund, and not be dependent on social welfare, gets once again hammered.
It will never stop until this bunch of thieves and incompetent clowns get thrown out of office and someone, hopefully fiscally responsible is in place.
Still when we have a Doctor of Philosophy (ie. probably couldn't balance a cheque book) as the Treasurer, what would we expect.

well said

Agree. Yes Minister. The playing field is never level, and won't be any time soon.

Unlike the Hawke / Keating era, the current crop of labour politicians run "the politics of envy" as as a fundamental strategy . In this case they are targeting certain SMSF members who have had the brains and investment nouse to get their total superannuation balances above $3m.
I suspect that if the 30% tax rate applied to income only pro rata above the $3m figure, and did NOT apply to unrealized capital gains, and the $3m was was indexed, most SMSF members would accept the proposal.

There are a number of non govt recipients of defined benefit pensions also who will have the same issue. What gets missed in any debate on this is that there is NO capital to use/draw down - yes it’s an annual income but this has been taken at the expense of having any capital amount available. A very very important point in any assessment of defined benefit pensions that are being relied on now.

That may be so.

But what about never having to worry if your super is going to run out. Many people live beyond when their super runs out but those on defined benefit don't have that worry and continue to live on their final salary at retirement. I think having no capital to transfer to beneficiaries is a small price to pay. Can't really feel sorry for those on a defined benefit scheme.

Sadly a DB pension does not mean you get to live on your final salary. Final average salary is a factor in the formula for calculating the pension, along with years of contribution and personal contribution rate, it’s not the actual pension amount.

I would argue that while they don't have a specific pool of capital to call their own they have access to an endless pool of capital funded by the public and the Future Fund, which is a distinct advantage to people of the same age who only have the age pension to fall back on when their defined contribution super runs out.

Totally agree!