Military Superannuation

Miltary Super - Fact Sheet

Published on Saturday, 09 July 2011 12:30 |

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MILITARY SUPERANNUATION

This topic covers DFRB/DFRDB and MSBS and addresses six subjects:

Indexation of military superannuation pensions
Income tax levied on military superannuation pensions
MSBS MBL Limits
Surviving Spouse Pensions under MSBS and DFRDB
DFRDB Commutation and Life Table Issues
Extension of Superannuation to ADF Reserves

1. Indexation of Military Superannuation Pensions

What do we want?
Military superannuation pensions must increase twice annually by the same percentage as the Age Pension. We do not seek special indexation treatment, despite the unique nature of military service and despite our compulsory contributions of 5.5% of our pre-tax pay while in uniform. We only want equity with our fellow Australians, not with MPs. The erosion of military super pension purchasing power must stop.

Why do we want it?

Military superannuation pensions are indexed by the Consumer Price Index (CPI). CPI was abandoned in 1997 for Age and other welfare pensions because it did not protect pension purchasing power. Welfare pensions are effectively indexed by the greatest of CPI, the new Pensioner and Beneficiary Living Cost Index (PBLCI) or Male Total Average Weekly Earnings (MTAWE). And pre-2004 MP superannuation pensions are generously indexed to the salaries of today’s MPs. Age and MP pensions rose 130% and almost 140% respectively 1989-2009. Military super pensions rose 70%, which does not maintain their purchasing power. Check the graph. That’s unfair.

Who Will Benefit?

Today’s 64,000 military superannuation pensioners, as well as future military superannuation pensioners. This compares with the 3.3 million Age and other welfare pensioners who are, rightly, effectively linked to the greatest of CPI, PBLCI or MTAWE.

What’s Wrong With CPI?
The Australian Bureau of Statistics (ABS) said in 2001 that “…CPI is not a measure of the cost of living.” And no fewer than five parliamentary inquiries and reviews since 2001 recommended replacing CPI with a fair method. Even the Jess Committee way back in 1972 recommended that military superannuation pensions “…be adjusted annually so that relativity with average weekly earnings is maintained.” The Government set up yet another inquiry (by actuary Trevor Matthews) in mid-2008. Mr Matthews reported Dec 2008. His findings, released Aug 2009, fail to fix the issue.

Is the new (2009) Pensioner and Beneficiary Living Cost Index the Solution?

No. The Government tasked ABS to develop PBLCI for welfare pension calculations because CPI by itself does not protect pension purchasing power. But military super pensioners were totally ignored, meaning we stay with CPI. And even if we are switched to the new PBLCI, the Government has already said that “[Age etc] pension rates will …continue to be tied to community living standards.” Age pensions, correctly, effectively rise by the greatest of CPI, PBLCI or MTAWE. Military super pension purchasing power must be protected the same way.

What About ‘Gold Plated’ Military Superannuation Pensions?

A myth. ADF people compulsorily paid 5.5% (DFRDB) or 5% (MSBS) of salary to their super. But the median DFRDB pension, usually benefiting a couple, is under $20,000. The DFRDB mean is $22,042 (MSBS $20,202). Both are taxable. The couples Age Pension is $27,482 (single $18,216) and tax free. And military superannuation pensioners do not get free rides with the RAAF, free or subsidised housing or medical treatment, or any other universal benefit not available to other Australians.

What Will Fair Indexation Cost?
Using Mr Matthews’ own figures, we estimate a net first year (2010-11) cost of approximately $12m for indexation that protects today’s military superannuation pensions. $12m is <0.00004% of 2010-11 Budget outlays and is an infinitesimal % of GDP. And Future Fund assets to pay unfunded super liabilities are $67.6billion (Mar 2010). As with all pensions, the cost compounds over time. But the Australian Government Actuary says (2005) that Government “claws back” about 25% of the extra cost due to increases in income tax and GST, and to reductions in welfare pensions. “Clawback” also compounds over time.

What About “Unfunded Liabilities”?

Mr Matthews alleges that “unfunded liabilities” for military super are $15 billion! But that’s over 45 years, not one year. And this extraordinary and highly questionable number will drop significantly when the Government soon introduces its new super scheme to replace MSBS. What is the “unfunded liability” for the Age Pension or for pre-2004 MP super pensions? Billions and trillions? Mr Matthews does not say.

Is Fair Indexation Affordable?

Yes. Using any benchmark, indexation reform is affordable. Compare it with the $42b stimulus package or the major age pension increases in the 2009 budget or the hundreds of millions spent on questionable advertising by governments of all political colours. And Future Fund assets (Mar 10) were $67.6b. Even PBLCI reportedly cost over $18m to develop, more than the net cost of a year’s fair indexation. Using Mr Matthews own figures, the additional first year net annual benefit for a ‘mean’ DFRDB pensioner is about $200. That’s under $4 per week. And it’s taxable. Is that affordable? Regardless of all the numbers, if fair indexation is affordable for 3.3m Australians, and if very generous salary-based indexation is affordable for

pre-2004 MPs, why is indexation reform unaffordable for 64,000 former servicemen and women, and those they leave behind?

Proposal: That the Government protect military superannuation pension purchasing power by increasing pensions twice annually by the same percentage as the Age Pension.

2. Taxation of Military Superannuation Pensions

Military superannuation pensions are paid from what are called “untaxed” superannuation funds. Under the taxation changes introduced by Better Super, those pensions are not only taxed, but are also included in pensioners’ total income for tax purposes.

The only reason the military schemes were “untaxed” was because of a Government convention that it did not pay tax to itself. Had it done so, the net cost to the Government (i.e. the taxpayer) would have been exactly the same.

There is no evidence that any government considered the benefits to the taxpayer of the compulsory payments of 5.5% (DFRDB) or 5% (MSBS) taken from each serving member’s pre-tax salary.

The Better Super distinction between “taxed” and “untaxed” schemes is artificial but creates real disadvantages for military superannuation pensioners, including widows and widowers. The most obvious disadvantage is that their superannuation pensions are taxed until the day they die. And any additional income from savings bank interest or other sources is taxed at their marginal rate, not at the base rate like other Australians aged over 60.

The present tax regime, despite including a 10% tax rebate after age 60, is clearly not equitable with the treatment given to most other Australian superannuants.

Proposal: That the Government abolish income tax on DFRB/DFRDB/MSBS military superannuation pensions, including death and invalidity pensions, from age 60 in line with the majority of the Australian community.

3. Maximum Benefit Limits (MBLs)
The Military Superannuation and Benefits Scheme (MSBS) sets Maximum Benefit Limits that are more onerous on service people than on any other Australians.

MBLs are limits on the maximum amount that the military superannuation fund will pay out. MBLs should not to be confused with Reasonable Benefit Limits (RBLs) which limited the amount that could be contributed and accumulated at concessional tax rates. RBLs were abolished in July 2007 but MBLs were not.

MBLs include the sum of both Employer and Employee benefits.

There are two MBLs: An all-pension MBL, at which the member must stop contributing because the member’s total payout has peaked; and a Lower Lump Sum MBL at which the member may stop contributing because the member is getting close but is urged to seek specific advice.

When a member reaches the MBL limit neither s/he nor Government contributes to MSBS.

An affected member’s package effectively reduces by 28% compared with someone at the same rank doing the same job who has not reached the MBL limit.

The effect of the application of this measure is that many long serving ADF personnel receive no retirement income benefit for their final years of service.

The Report of the Review of Military Superannuation Arrangements (Podger Report) recommended that MBLs be scrapped for MSBS. The combined Ex-Service Organisations supported that recommendation.

Governments have been asked a number of times to resolve this issue but refuse to take any action until the Podger report had been fully considered. The report was given to the Government in Jul 2007, where it remains.

The MBL anomaly was resolved for public servants in 2007. MSBS members remain in limbo three years later.

Proposal: That the Government immediately remove MBLs in the MSBS superannuation scheme.

4. Pension Rates for Surviving Spouses

Current military superannuation schemes have spouse benefits. If a member in receipt of an indexed pension dies, their surviving spouse receives a reduced pension. We have no quarrel with the principle of this, only its application.

The spouse pension for MSBS is 67% of the deceased member’s pension, noting that the pension received under MSBS need not necessarily be linked to final pay.

For DFRDB the spouse pension is 62.5% of the uncommuted pension amount.

Surviving military spouses receive a considerably lower percentage than the surviving spouse of a pre-2004 MP (PCSS), who receives 82.5% of the deceased MP’s pension.

There is no valid reason why spouse benefits under the military superannuation schemes should be less than that for any parliamentary superannuation pension scheme, noting that the issue is one of percentage benefits, not quantum (number of dollars received).

Servicepeople and their surviving spouses are not second class Australians.

Proposal: That the Government align the spouse benefit (reversionary rate) for DFRB/DFRDB/MSBS schemes to the level of the pre-2004 parliamentary scheme (PCSS).

5. DFRDB Commutation and Life Table Issues
The option to commute part of a DFRDB pension entitlement for a lump sum was an early recognition of the unique nature of military service.

Military service was, and is, overwhelmingly a young person’s calling. Even with today’s higher retiring ages, the national interest is better served by a younger ADF.

The national interest requires that people are encouraged to stay in uniform if they are moving up and to depart if they are not. No-one wants platoons of 60 year olds in Afghanistan.

And military people were compulsorily retired at relatively early ages after frequent moves and little if any opportunity to establish a home, which further justified the lump sum commutation payment as a “pre-payment” of future superannuation pension entitlements, noting that commutation is not and should not be treated as a loan.

Retiring members were not expected to invest the commuted lump sum to provide an income stream. They needed the money to establish themselves in civilian life. There was never any mention of “conversion factors”.

In other Commonwealth funded superannuation schemes a lump sum is provided without any repayment or conversion factor.

The continued use of out of date life tables means that the amount of money deducted from each fortnightly superannuation pension payment to “repay” the lump sum far exceeds the amount that would apply if updated life tables were used. We believe it was an oversight that the DFRDB Act did not provide for the periodic updating of the life factors.

Proposal: That the Government immediately adopt up to date life tables in calculating commutation and fortnightly payments for all new DFRDB superannuants.

6. Extension of Superannuation to ADF Reserves
Membership of the military superannuation scheme for the ADF reserve is restricted to members on continuous full time service. The majority of reserve people work reserve ‘days’ and are not permitted to contribute to military superannuation. Nor does the Government contribute any employer benefits.

Proposal: That the Government introduce more flexible MSBS membership for all ADF reserve members, with a Commonwealth employer contribution of 9% under the Superannuation Guarantee (Administration) Act 1992 for all reserve service not presently covered.

RSS

Brian O'Neill (19.07.2012 (19:21:58))

Fair Indexation

I voted for on the The Prime Minister says: Post and vote on OurSay! I also made the following comment:
Prime Minister when are you going to be honest with the community and give the correct costings for fair indexation of DFRDB Pensions? Your figure of $2.1 billion was a costing for 45 years, or $375 million in the first year. Do the maths, $375 million divided by 56,000 Ex-Servicemen is equal to $6696.43 each a year. Boy I would love that to help pay for the increases I am seeing in electricity, food, rates, petrol, telephone cost, etc, and which I am sure will rise after the new Carbon Tax introduction. But in reality the 56,000 only average $23,000 a year and the CPI has been already costed in future figures, so it is only the difference between CPI and PCBLI which this year was 1.3%. 1.3% of $23,000 is only $299 a year and if you multiply this by the 56,000 it is equal to only $16,744,000. Isn't this affordable Prime Minister?

Is this a valid comment for the rejected Bill?

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http://www.justafairgo.net/index.php/the-issues/military-superannuation

John Face (15.07.2012 (03:52:11))

DFRB/Graph

Can some prominence be given to DFRB pensioners eg can the mean DFRB amount be published and the High Court decision that DFRB invalidity pensions were tax free and retrospectively legislated as taxable to the detriment of existing pensioners be reported?
Can the graph be updated to 2012?
Can some reference be made to the parliaments' intentions as set out in the DFRB/DFRDB/MSS Bills second reading speeches?
Can any legislation for a new non-defined benefits military superannuation scheme be opposed as it will just return military superannuants to the unsatisfactory 'deferred pay' arrangements which the DFRB Act of 1948 was set up to remedy?

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