Unfunded super liabilities balloon

Tony Shepherd’s clinical analysis of the unfunded military scheme has focused public attention on the federal government’s unfunded superannuation liabilities. Until then, this very large expenditure item has received very little attention from successive governments.
The result is a burgeoning liability adding to the challenges of funding an ageing population. The budget figures show how out of control Canberra’s spending is.
Total federal wage and salary expenses will be $19.6 billion in 2014-15 while total superannuation outlays on an accruals basis will be $13.6bn (69 per cent of total wages).
The Finance Department has advised that actual cash outlays in 2014-15 will be $7.4bn (37.4 per cent of total wages). What remains unclear is how the accrual-based special appropriations totalling $12.3bn for all defined benefit funds, that are not needed to fund current cash outlays, are used.
The federal government contributes 15.4 per cent of salaries, 5.9 per cent more than the standard compulsory 9.5 per cent contribution to its funded schemes. The total superannuation on-costs would be about $3bn if all its employees were in funded schemes but this would only be the case in 40, or even more, years. At that time, well in to the next century it will still need to fund the remaining outstanding unfunded benefits.
Federal employees’ hopes that the $100bn in the Future Fund earmarked by the Howard government will cover these bills are likely to be dashed for two reasons.
First, a future government with control of both houses could dip into this honey pot for other purposes considered more pressing. Second, there is a high probability that the future bills will grossly exceed those currently reported.
The track record is not good. Advisers have consistently under-estimated the accruing liabilities on several accounts demonstrated yet again by the latest $3bn upward revision. Their mortality assumptions have been overly optimistic. They have under-estimated the percentage of members who opt to take their defined benefits as lifetime indexed pensions with attached surviving spouse benefits. More worrying still for future taxpayers, the funds offer pension benefits to members on an extremely generous and costly basis.
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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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