Less superannuation but more pay, please

If the federal government believes that 12 per cent of salary is the correct level of compulsory super for all employees, there is no justification for forcing its own employees to contribute 15.4 per cent.

Even though it was introduced only eight years ago to replace the defined-benefit Public Sector Superannuation scheme (or PSS), the PSS accumulation plan (PSSap) has already passed its use-by date.

Largely unforeseen developments have greatly reduced the benefit of this plan for many members, who would be better served by receiving less employer super but a higher wage.

Major changes since the PSSap was introduced include the penalty tax regime levied on employer contributions in excess of $25,000 a year, and the prospect of widespread job shedding and public service redundancies. These developments, along with the prospect that the preservation (minimum possible) age for accessing super benefits will be increased above the current age of 60, justify major changes to the government's super arrangements for PSSap members. 

Essentially, the problem is that the compulsory employer contribution to the PSSap is 15.4 per cent of salary, far above the standard compulsory employer contribution of 9 percent. 

Even when this increases over time, as proposed, to 12 per cent of salary, public servants will still be forced to allocate an extra 3.4 per cent of their remuneration to compulsory super. This is despite the fact that a policy of providing all federal employees with 12 per cent of salary as compulsory super and an extra 3.4 per cent of salary as wages would benefit both employees and the employer. 

For young people and lower-income employees, the benefits of having extra money tied up, untouchable, in super until the age of 60 are questionable. Even though receiving extra pay may involve a higher tax bill, there will always be extra money available to pay off mortgages and reduce debt – especially in situations where there is no guarantee of keeping one's job until the preservation age.

Put simply, if the federal government considers that 12 per cent of salary is the correct level of compulsory super for all employees, there is no justification for forcing its own employees to contribute 15.4 per cent.

The reality is that public servants, along with private sector employees, can arrange to contribute more to super via voluntary salary-sacrifice contributions. That is to say, as long as the extra 3.4 per cent of salary is paid as extra wages, no PSSap member would be adversely affected by reducing the compulsory PSSap contribution to 12 per cent. 

This would be a major improvement also for higher-income public servants, who are currently subject to penalty tax bills for employer contributions in excess of $25,000 a year.

At the current 15.4 per cent employer contribution, penalty tax liabilities start for employees earning $162,337 a year. If the compulsory contribution were reduced to 12 per cent, the penalty tax trigger point would be a much higher $208,333 a year.

The case for major changes to the compulsory PSSap employer contribution rate is also strengthened by laws enacted last month to reduce the harshest aspects of the penalty tax legislation. This legislation allows taxpayers receiving employer contributions in excess of the annual cap to withdraw the excess from their super fund and be subject to their marginal tax rate.

What this means in practice is those higher-income taxpayers will be able to take all of their compulsory employer super benefits above $25,000 a year as extra wages. This will create administrative problems for the PSSap and the employees concerned, and it would be much simpler to limit the maximum annual compulsory PSSap employer contribution to $25,000, or to whatever annual level the maximum is set at.

To the extent that PSSap members would opt to take the extra 3.4 per cent of salary as wages instead of more super, the government would benefit from higher personal income tax collections. Now that the two generous defined-benefit funds, CSS and PSS, are closed off to new members, there are no compelling reasons for the government to force its employees to put more of their remuneration into super than their private sector colleagues do. 

As long as the reduction in the compulsory employer contribution is accompanied by a compensating increase in public service pay, this would be a win-win situation for federal employees and the next government.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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