The Treasurer’s welcome attack on public service pension rorts

Sadly he received very little public credit, but in Scott Morrison’s 2016 budget, the Treasurer took the first steps to tackle what is undoubtedly the biggest long-term financial problem facing Australia — the unfunded public service pension scheme.

That scheme represents a budget black hole of between $400 billion and $600bn and it is expanding at a pace of around $6bn a year, fanned by expensive rorts that past treasurers have been too frightened to tackle.

Peter Costello set up a Future Fund during the mining boom in an attempt to cover the cost but he greatly underestimated the size of the black hole and its explosive rate of growth.

The Future Fund currently has about $120bn invested, which covers only about a quarter of the black hole.

Soon after Scott Morrison took office, I alerted the Treasurer to the problem and he acknowledge that alert on budget night (The superannuation review must include the public service, November 16).

Morrison now understands that whereas the public servants say the deficit in their defined benefit fund (including judges) is only $200bn, they use unrealistic calculations that do not take into account the interest rate fall and some of the rorts that the public servants have injected into the fund when Treasurers have been asleep or too weak.

The massive shortfall only involves public servants, including judges, who were hired prior to 2007. Those who were hired after 2007 receive an accumulation entitlement similar to the private sector and there is no shortfall. But those hired before 2007 have a lifetime indexed annuity plus entitlements.

The worst of these rorts is the entitlement awarded to retired public servants who have lost their spouse/partner. If they take on a new spouse/partner, then that person continues to receive the public service pension for life when the retired public servant dies. The new partner/spouse could be aged 30 and live to 100.

The private sector simply could not afford such a generous entitlement but nor can Australian taxpayers.

Scott Morrison has not tackled that rort and indeed has not reduced the basic indexed fund entitlement.

But what he has done is to superimpose the changes that he plans to make to private superannuation onto the public sector. He was helped by consultants from the private sector who understand the real cost of public service pensions.

One of the rorts that has been captured by applying the proposed private sector rules is the ability of employed public servants to receive their annual entitlement to the bonanza pension but to also sacrifice salary and invest in a conventional accumulation fund separate from the pension. It was blatant double dipping.

Under the Morrison proposal, from July 1, 2017, the government will estimate both a notional and actual superannuation contribution for members of the pre-2007 defined benefit funds.

Members of pre-2007 defined benefit schemes will still be permitted to make concessional (tax deductible) contributions to accumulation schemes, however, not only will the new $25,000 cap in the private sector be imposed but it will be reduced by the amount of the public servants ‘notional contributions’ to the defined benefit fund.

There are also new clamps to non-tax-deductible contributions to accumulation funds that equate to the $500,000 lifetime contribution clamp.

From July 1, 2017, members of defined benefit schemes and constitutionally protected funds will be subject to the $250,000 threshold for high-income contributions tax (subject to current constitutional exemptions).

To broadly replicate the effect of the proposed $1.6m cap, pension payments over $100,000 per annum paid to members of unfunded defined benefit, will continue to be taxed at full marginal rates, however the 10 per cent tax offset will be capped at $10,000 from July 1, 2017.

For members of funded defined benefit schemes, 50 per cent of pension amounts over $100,000 per annum will now be taxed at the individual’s marginal tax rate.

Double dipping in the accumulation funds will involve large figures but the other changes do not have a big financial impact because they are concentrated on higher earners.

At some point the next Treasurer, whether it be Scott Morrison or Chris Bowen, will have to face this gigantic national problem. Morrison has set the precedent.