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SELECT COMMITTEE ON SUPERANNUATION - 01/07/2002 - Superannuation and standards of living in retirement

CHAIR —It is a pleasure to welcome the Australian Council of Public Sector Retiree Organisations. I remind the witnesses as well as my colleagues that last time you appeared before us we picked up a number of your recommendations which actually saw some legislative improvements for your members. It was probably not enough, but I suppose everything is an improvement. Let us hope we can have similar success today. We invite you to speak to your submission.

Mr Johnson —I would like to add one point on behalf of Mr Morony. He is also a member-elected representative on the South Australian Superannuation Board, but he is not appearing here as a representative of the South Australian government.

Mr Morony —Or the superannuation board, in fact.

Mr Johnson —Mr Chairman and members of the committee, thank you for providing this peak council with another opportunity to press for changes to public sector superannuation. It is part of our endeavours to have superannuation benefits for retired civilian government and military personnel adjusted to match the standards enjoyed by the rest of the Australian community. ACPSRO asked the former Senate Select Committee on Superannuation and Financial Services to recommend changing indexing of our pensions to twice yearly. As most of the members of this committee were members of the former committee, we would like to record our appreciation for the efforts of the former committee in achieving that change for our members. We of course look forward to achieving further urgently needed improvements as a result of this hearing.

Our submission sets out the matters which are still of great concern. Rather than repeat what has already been submitted to the committee, I would like to set the scene in the broader context in line with some of the issues you have listed as likely to be addressed during this inquiry. First of all, it is essential to convince this committee that public sector pensions, which have been eroding for the last decade in terms of living standards, are quite modest benefits. There were 116,000-plus CSS and PSS pensioners as at 30 June last year and 62 per cent of that total receive $20,000 per annum or less as a pension. The military situation is just as depressing: as at the same date, there were 57,500 pensioners and 80 per cent of this total receive $20,000 per annum or less.

Looking at the midlevel of these pensions, 26 per cent of Commonwealth civilians and 15 per cent of the military receive pensions of between $20,000 and $30,000 per annum. It is only fair that we also address the higher end of the pension scale. At the higher end of pension payments, only three per cent of civilian, Commonwealth CSS and PSS pensioners and 1.4 per cent of military pensioners receive $40,000 or more per annum. If you combine the highest civilian and military numbers in this category, it is a mere 4,500, or 2[half ] per cent out of a combined total of 174,000-plus pensioners, who receive $40,000 or more, and, to refine it just one step further, only 0.7 per cent of pensioners receive $50,000 or more per annum.

The low levels of these pensions are further highlighted when compared to the income test for receipt of a part or full Centrelink pension. Currently, from 1 July to 19 September this year, married couples receiving less than $51,454 per annum combined could be eligible for a part or full Centrelink pension and singles receiving less than $30,810 could also be eligible for a part or full Centrelink pension. This now means that nearly all public sector civilian and military married superannuants could have an eligibility for a part or full Centrelink pension. Whether they qualify under the assets test we do not know, but they could if they did. The state situation is in many cases less attractive, and therefore it is important once and for all to dispel the opinion held by so many in government, as well as the community, that all public sector superannuants receive generous benefits. The majority are not receiving generous benefits at all and very many find retirement less than rewarding or satisfying after 30 or more years of government service during which time they made personal contributions to their own superannuation. It makes us very angry when we read articles by financial journalists who refer to our public sector superannuation schemes as being `Rolls Royce models'. That was in an article published a few days ago.

Reflecting community attitudes, it is also government policy to encourage older citizens to remain in their own homes for as long as possible. The current superannuation preservation age is 55. So, looking at the age profile, for example for CSS pensioners, it shows a steady rise in numbers from 60 years of age and peaking in the 75 to 80 bracket. The last census of the nation, the 2001 census, also reveals that there are now in excess of four million people 55 years or over, with 1.7 million of these who are 70 years or older. Of the 70 years or over group, about 10 per cent are admitted to aged care facilities, and we have been told that this number tends to remain fairly constant. The remaining 90 per cent of 70 years or older continue to live independently or are cared for by their family or other carers. Many public sector superannuants are in the 70 or over bracket and, considering the large number of these at the low-income end of the scale, their ability to continue to live independently is being adversely affected by the erosion in the value of their pensions due to the inadequacy of CPI indexing.

However, the alternative for some of these retirees of seeking admission into aged care facilities would be a much greater cost to government than would be the added cost of improving public sector pension indexing. In dollar terms at present, the average daily amount across all states and territories paid by the government as residential care subsidy to nursing homes for each resident classified at level 1 is $109 per day, or just under $40,000 per year. At level 5, which is hostel care, the subsidy is $13,500 for each resident. Added to this are the personal contributions the resident must make by law. Therefore, increasing admissions to aged care facilities by, say, 1,000 would incur an additional annual cost of $40 million at level 1 care and $13.5 million at level 5 hostel care. At the federal level our whole approach to this inquiry is consistent with the government's desire for retired people to live in their own homes as long as possible and is, in our view, affordable in budgetary terms. We look to the government to encourage the states under the terms of the heads of government agreement to adopt any changes made as a result of this inquiry. I would like ask my vice-president, Commodore Adams, to say a few words too.

Cdre Adams —It is against these changes in Australian society, particularly in respect of ageing, that we have invited your committee to address the issues covered in our submission, particularly as they affect Commonwealth and state funded superannuants. In addition, we have indicated where our people are financially disadvantaged vis-a-vis the wider Australian community. For example, the practice of income splitting already exists in that both DSS and DVA pensions are split between husband and wife. Apart from equity, we believe that the recommendations we have made to your committee will go a long way towards providing fairer outcomes for our people and will enable those of mature years to enjoy less stressful and worrying retirement.

Furthermore, we believe that it is the duty of government to ensure that those who have loyally served governments in important fields of public service, including military service, should not be forgotten to become the poor relations in Australian society. It is against this background that we have asked you to consider the issues outlined in our executive summary. The reasoning for our recommendations is developed in the main body of the paper. Finally, we see the correction of anomalies, such as indexation, income splitting, taxation, especially the superannuation contribution surcharge tax and reversionary benefits, as urgent because the disadvantage gap now being experienced by over half a million Australians is widening every day.

While the recommendations in our paper stand on their own, there are two matters in particular that we would wish to draw to your attention. In relation to the notional surcharge contribution factors, one aspect applicable to military personnel in the calculation of tax surcharge liability is of particular concern to us. We believe that it is iniquitous that Australians who volunteer to go in harm's way as members of Australia's armed services should be assessed at a higher rate than those in civilian occupations, simply because military superannuation schemes are deemed to be more beneficial. We believe that this is reverse discrimination of the worst sort.

Finally, we have gone into the question of costs in some detail in the paper. It is particularly drawn to your attention that the increased costs incurred by government are quite manageable in that the long-term cost of all the existing schemes is, according to the Commonwealth Actuary, a reducing one when expressed as a percentage of GDP. I would like to ask our councillor to represent the views from South Australia as they relate to their scheme.

Mr Morony —I represent South Australian state public sector superannuants. I will not revisit things that have already been said by my colleagues during their introduction, other than to reinforce Mr Johnson's observation of the erosion of the value of CPI indexed pensions and to emphasise that the loss of value of a pension is of particular concern to people who are retired for a relatively long time. People are retiring earlier and are living longer. Retirement at age 55 instead of the previous nominal age of 65 is increasingly common. At the same time, life expectancy is increasing quite dramatically. The pattern of people leaving the work force at age 65 and spending, say, five years in retirement before passing on has been replaced by people living perhaps 30 or more years in retirement. The cumulative loss of pension value over a period of 30 years can be quite significant.

I refer the committee to the two charts that have been tabled. These charts illustrate the point quite clearly, showing as they do that, between 1990 and 2001, the growth in average weekly earnings was 20 per cent more than the growth in CPI. Even the age pension rose 16 per cent more than a CPI indexed public sector pension. Therefore, a system of indexation that links public sector pensions to a wage index as well as the CPI, similar to the methodology adopted for the age pension, would be far more equitable.

CHAIR —Is it the wish of the committee that the document be incorporated in the transcript of evidence? There being no objection, it is so ordered.

The document read as follows

Mr Morony —Turning to the question of the tax status of schemes such as the South Australian defined benefit pension scheme, the analysis we have done indicates that the untaxed status of the scheme places members at a disadvantage compared to members of taxed complying pension schemes. This is on top of a loss of value attributed to CPI indexation. The key issue with respect to Super SA being an untaxed scheme is the 15 per cent tax rebate that members of a taxed scheme are eligible to claim. The calculations that lead us to this conclusion are in annex B to the ACPSRO submission. In essence, the calculations are based on the assumption that a pension from an untaxed scheme is notionally commuted to a lump sum. No cash payment is involved; it is only a book entry. The tax due on the lump sum is paid to the Australian Taxation Office. The notional lump sum is rolled over to a newly created taxed scheme. The pension benefit derived from the new taxed scheme is reduced by an amount that offsets the tax paid. The member is then able to claim the 15 per cent tax rebate.

Our calculations show that the net income after tax is higher if a pension is paid from a taxed source. The reason for the discrepancy between a taxed and an untaxed scheme is the treatment of the pre-1983 component of the pension. A pension from an untaxed source carries no entitlement to the 15 per cent rebate but, more particularly, it carries no entitlement to a rebate for pre-1983 service. This is in stark contrast to the pensions from a taxed source that do carry an entitlement to a rebate for pre-1983 service.

The considerations can be quite complex, and it is difficult to dissect the calculations in a hearing such as this. SA Superannuants make no claim to being experts in the field, so we are looking for someone who is qualified in the area of taxation and Centrelink regulations to examine the proposals outlined in annex B of the ACPSRO written submission. If we are correct in our conclusion that a taxed scheme offers improved net benefits, we would be anxious to see our members given access to those improved benefits. In answer to critics who might suggest that our proposal amounts to a form of double dipping in respect of both tax concessions and the age pension, I would point out, firstly, that the pension scheme members are far from affluent and, secondly, that the proposal involves only extending to our members exactly the same conditions that apply to other members of the community. It is understood that some state public sector schemes, specifically in Victoria and Tasmania, have already put in place arrangements that enable their members to take advantage of the 15 per cent taxed rebate and age pension entitlements. It would be particularly inequitable if taxation regulations preclude SA Superannuants from the benefits already enjoyed by members of other public sector schemes.

Finally, I would like to repeat two points that are made in the written submission. Firstly, annex B, which deals with the tax status of schemes such as Super SA, relates only to the defined benefit pension schemes; and, secondly, the election to transfer to a tax regime must be voluntary rather than across the board—and the reasons for that are outlined in our written submission.

Mr Johnson —That concludes the introductory part, so we are available to field questions or talk about particular issues.

Senator SHERRY —Mr Morony, in the example you just gave us of the 15 per cent rebate and its impact on taxed schemes, did you factor in any figure for the cost of fees, charges and commissions that would be debited against the income stream that resulted?

Mr Morony —No, but I cannot see that there would be any change in that, because those fees are included in the existing level of pension. They are taken into account in the administration of the existing fund. All this really does is transfer that fund into the taxed regime, so I cannot see a great deal of extra administration costs associated with that.

Senator SHERRY —When you compare the outcome of a taxed scheme and an income stream—whatever form that takes—in the private sector, it varies from adviser to adviser. But there is a fee and a charge that they make, which would reduce the benefit paid from that area.

Mr Morony —Administration fees are already incorporated into the existing pension scheme.

Senator SHERRY —I understand that. In a government scheme they are, but they are much higher in the private sector.

Mr Morony —Yes, they are. They are normally about two per cent higher.

Senator SHERRY —They can be higher than that, or so we heard this morning. I am wondering whether, in any comparison with the outcomes from a tax scheme—

Mr Morony —Senator, I hope you are not under the impression that I am suggesting that the rollover be into a private sector pension scheme. That is not what we are proposing.

Senator SHERRY —Okay. I just wanted to clarify that. This advertisement that you have on your submission did intrigue me—the `Separated or Divorced?' advertisement.

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Air Vice Marshal Paule —The advertisement that Stephen Bourke was involved with.It was in the Canberra Times. That is a direct copy of the advertisement.

Senator SHERRY —It says: `Ask the Architect of the New Laws at Supersplitting.' Do you know on what basis this person claims that they were `the architect of the new laws'?

Air Vice Marshal Paule —Yes. When the laws were first being mooted, there was at least a bill—there might have been more than one bill—

Senator SHERRY —We just got another one.

Air Vice Marshal Paule —and we had discussions with the Attorney-General's Department. The man we had discussions with was Stephen Bourke, this very guy. We presume he is now retired or has left the Public Service and has set himself up.

Senator SHERRY —At that time, he was working in the Public Service?

Air Vice Marshal Paule —He was two or three years ago, yes. He was a senior member of the Attorney-General's Department.

Senator SHERRY —I think we will have to have a look at that because I am not sure it is ethical to go out touting your services and advising, having taken part in the advice to government.

Air Vice Marshal Paule —We were taken aback when we saw it.

Senator SHERRY —I am taken aback by it too.

Air Vice Marshal Paule —We thought we would bring it to your attention.

Senator SHERRY —I am taken aback by it too; I find it amazing.

Air Vice Marshal Paule —We have not contacted him about it, by the way.

Senator SHERRY —Okay. We will follow that through in another forum.

Cdre Adams —I think the point we are really making, which is referred to in an article there, is that the Family Law Amendment (Superannuation) Act condones income splitting.

Senator SHERRY —Yes, you are right. There is an incentive to income split when you get divorced.

Cdre Adams —This does tell you how to do it to your best advantage. But if you are not divorced, the option for income splitting is not there. In our submission we have actually said that, if you are clever enough, you can probably organise a Clayton's divorce in order to achieve that.

Senator SHERRY —I think that is right. Finally, I have one question on the military superannuation and the way in which the surcharge tax is calculated. You were saying, Commodore, that because of the structure of the military superannuation fund—and I have heard this in respect of police fund as well—the notional surcharge tax outcome is higher; why is that?

Cdre Adams —That is actually at paragraph 26.

Air Vice Marshal Paule —It is because the Actuary is required to calculate these notional surcharge contribution factors based on the value of the cost to set up the scheme. Because the military scheme has some aspects associated with it that other Commonwealth schemes do not have, the Actuary considers that it is a more beneficial scheme and, because of that, it costs more.

Senator SHERRY —I understand that. Do you know what those benefits are? I am not an expert in the military fund.

Cdre Adams —It is a death and disability provision.

Senator SHERRY —Yes, I thought it might be. It is the same problem that the police have talked to me about as well. They have the same problem, in principle.

Cdre Adams —That would be right. There is no way that you could construct a military scheme now that did not have a death and disability provision in it. Because it has that it is deemed to be more beneficial. We get the answer back from the Public Service and the department that the scheme is more beneficial.

Senator SHERRY —The difference is, a bit like the police, that you effectively have a workers compensation type arrangement in the defined benefit fund, whereas workers compensation type disability arrangements, if you like, are separate from most other superannuation funds.

Cdre Adams —The military has a healthy compensation scheme as well, but that is an additional safety net which is built in for people who join the regular Defence Force.

Senator SHERRY —On the basis of disability, you can get an early payout of your pension from the military fund, the same as the police.

Cdre Adams —Yes.

Senator SHERRY —And because of the nature of the work I suspect that the disability provision is more widely used than it would be in other funds, where it exists.

Cdre Adams —It probably is, because of the nature of the work.

Mr Johnson —I think I can add a little bit to that. I have in front of me a letter from February last year written by the Commonwealth Actuary dealing with this particular issue. Because of the questions being asked about why is the military one structured like it is, I will read just one paragraph from his letter:

Firstly, I must emphasise that for both the CSS and DFRDB we have used the approach prescribed by legislation. In essence, the legislation requires surchargeable contributions to be calculated as the value of benefits accrued in a year and the insurance cover provided. The value of benefits accrued during the year includes not only retirement benefits, but also resignation, death and invalidity benefits.

If you go to the Actuary's triennial report, the last one for 1999, the employer value pension, the MSBS-DFRDB contribution is assessed collectively at about 25 per cent, and that is considerably higher than in the report covering the CSS and PSS. Consequently, they are being loaded. I think the way to look at this is that if we were working in a civilian occupation that was very hazardous and the employer carried insurance cover for us, he would be almost certainly paying a much higher premium because of the risk situation that his employees were involved in. Why then doesn't the government accept the higher cost because of the military occupation and not load it on under this arrangement?

Senator SHERRY —I understand that, and in the private work force a person would not be in a superannuation fund that would have, effectively, a death or disability benefit of that nature.

Mr Johnson —I agree with that, but the principle is important.

Senator SHERRY —Yes, it is an interesting issue. As I said, I have had the police raise it with me and I am concerned about it. Can you give the committee a copy of that letter later on, or send a copy to us?

Mr Johnson —I think my colleagues will agree. I would not see any problem.

Senator SHERRY —Thank you.

Cdre Adams —The issue is really summarised in paragraph 26.

Senator SHERRY —Yes, I have seen it there.

Cdre Adams —We think it is an important one.

CHAIR —Thank you very much for your presentation.

[2.04 p.m.]