Public servant super rort the biggest scandal of all

Senior public servants have lined their pockets, taking money from people with disabilities, health, education and defence.

The royal commission into banks, superannuation funds and other parts of the finance industry is uncovering multiple scandals with more to come.

But the terms of reference were carefully crafted so that the royal commission would have no mandate to look at the biggest scandal of all: the unfunded public service defined benefit fund.

Senior public servants have lined their pockets, creating a huge funding shortfall that endangers the money we are committing to people with disabilities, health, education, defence and other “worthwhile” causes, including future tax reduction.

Given that we are looking so closely at banks and private sector superannuation (industry and retail funds) it was mischievous that the royal commission was not allowed to cover the senior public servants and politicians.

Unless Australia is very prosperous in the decades ahead the current pledges for future benefits to ordinary people are in grave danger because Australia’s senior public servants have engineered massive benefits that are not funded and will need to be paid from future revenues.

The anomalies have been highlighted by the “$10 million club”. Members of the club include the same people who engineered massive retrospective reductions in the superannuation entitlements of ordinary Australians. The good news is that by retrospectively reducing the entitlements of ordinary Australians the public servants have created a precedent for a future retrospective reduction to their own “entitlements”.

Of more immediate importance, the $10m club created a two-tier scale of pay, making the public service almost unmanageable.

Tier one are public servants who joined the service before June 30, 2005, including most of the top public servants who bask in the defined benefit superannuation pension bonanza and associated rorts. Tier two are the newcomers who miss out. The cut-off dates for military people and politicians are different but no new employees are entitled to the bonanza benefits.

Let’s first look at the official deficit figures and then look at the real situation and the rorts that the club engineered which endanger the rest of us.

According to the official figures the unfunded liabilities of ordinary public servants in the bonanza fund is $137 billion, the military $83bn and the politicians $1bn — a total of $221bn.

There are also smaller unfunded pools of liability. We will deduct from that $221bn an assumed $150bn from the Future Fund so we have an unfunded liability of $71bn, which is growing rapidly with no funds to cover it.

A bunch of reputable actuaries have revealed they have calculated the $221bn unfunded liability by discounting future amounts owed by 5 per cent. Although this is in accordance with accounting standards, to my simple mind that’s actuarial gibberish. How can you discount a liability when there are no funds to back it up?

While I defer to actuaries, I checked with one of Australia’s best superannuation actuaries who coughed a bit and emphasised that the fund actuaries were perfectly entitled to use a 5 per cent discount. But given there was no money to back the liabilities he would have preferred a discount at the bond rate of 2.5 per cent. I asked him what that would do to the unfunded liability after deducting the Future Fund. More coughing, and he said that he would assume that the Future Fund continues to earn inflation plus 5 per cent. That’s a very optimistic assumption because Peter Costello won’t be there forever … but OK. If we go forward 20 years then the unfunded liability at a 2.5 per cent discount rises by $38bn and the escalation increases. Let’s not get caught in the details but we have a community-dividing pending crisis because we have promised government employees massive pension “entitlements” with insufficient money to back them and competing claims for future money in health disabilities, etc.

When Telstra moved from the government to the private sector it changed the rules because the worth of the salaries it paid executives who were not in the defined benefit fund was way below the worth of salaries of those in the fund. Telstra refused to grant salary rises to those in the bonanza public service scheme. From time to time these people received bonuses. Newcomers received higher salaries but did not participate in the superannuation bonanza.

Qantas went even further and effectively froze the defined benefits.

The Australian public service has followed neither Telstra or Qantas but instead it opted for the highly inefficient two-camp salary system and, worse still, it awarded senior public servants huge pay rises which put the fund further into the red.

And then a few rorts were thrown in.

For example, a public servant whose spouse has died can partner with another person and on the public servant’s death the new partner receives just over 67 per cent of the public servant’s pension (it’s 80 per cent for politicians). Nothing like that is available in the private sector annuity market because of the cost — the new partner (male or female) taken on at, say, aged 20 may live for another 80 years!

Given the promises we have made in disabilities, etc, unless Australia is very prosperous the $10m club may not receive their generous pensions. Lower paid public servants have a better argument. It’s going to be a huge debate.

To be fair there is taxation on the public service-indexed pensions, but in the private sector if an employer contributes more than $25,000 to a fund then that contribution is subject to penalty tax. The public service rules have not been brought into line.

And this is particularly important for the top people at the Reserve Bank and university vice-chancellors, etc, who joined their funds prior to 2007.

Unlike the public service, their funds are fully funded and those funds are receiving annual contributions of more than $25,000, which is not being penalty-taxed.