In Australia superannuation benefits for employees are being provided in two very different forms.
In the private sector, a trust fund is usually set up to ensure that an employer's insolvency will not deprive the employer's employees of their vested rights.
Contributions (including the compulsory superannuation guarantee charge) are regularly paid into this trust fund by the employer and (in most cases) also by the employees. Each year's employer contributions are a charge on that year's profits.
On the other hand, in the public sector, this trust fund concept is not used at either State or Federal level. Because governments are not subject to the same risks of bankruptcy and liquidation as are private sector employers, governments do not usually choose to accumulate employer contributions to meet their ultimate superannuation liabilities.
Up to a point this is fair enough, and it certainly stops official funds from gathering large pools of investment moneys which could be used to disrupt the private sector.
THE FUNDING OF BENEFITS
Governments normally set up funds in respect of employee contributions only. Liabilities are generally met on a pay-as-you-go basis - in other words, out of taxation revenue at the time of payment. But, by not setting aside appropriate employer contributions - as private enterprise employers do - the authorities are hiding the true cost picture from themselves and from the community. A frightening future tax liability is being built up for a later generation.
In the private sector, retirement benefits are paid either as lump sums - the usual method - or as fixed pensions. In the public sector the bulk of retirement benefits are paid in the form of indexed pensions. These serve to protect retired public servants from the ravages of inflation - but at a price for the taxpayer.
An indexed pension, at typical rates of inflation, is worth about twice as much as a fixed pension (for the same initial amount at retirement). The great value of this feature does not appear to be realised either by the public servants who benefit from it or by the taxpayers who provide it and who cannot enjoy equivalent privileges themselves.
A huge cost is now arising because of the over-generous provisions of most public service superannuation schemes in comparison with those available to the rest of the community.
The excessive generosity of public superannuation schemes is also most unfair to private sector employees, not only because they do not have access to similar benefits but also because they are forced to pay for the public service superannuation benefits directly through their own personal taxation and indirectly through increased inflation.
The fact that the authorities have never seen fit to publish the true costs of the public sector pension promises is deeply disturbing.
The Parliamentarians who pass the legislation creating these promises to public servants appear to be blissfully ignorant of the true cost being incurred. They have failed to ask the right questions of their advisers.
The next generation of taxpayers will not thank the present generation for having left them this extravagant legacy. In the interests of fair play, the whole subject of public service superannuation needs a lot closer study by the whole community.
© N E Renton 2006
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