Saturday, August 24, 2013

What is the True Cost of Military Superannuation?

Mr Ken Marsh

17 September 2012

The Hon. Wayne Swan
Parliament House
Canberra, ACT 2600

Dear Treasurer

I refer to a speech made in the Senate by the Hon. David Feeney on Wednesday 12th September regarding military superannuation and in particular the DFRDB Scheme. In his speech Senator Feeney a number of times spoke of the ‘generous’ nature of the DRFDB scheme and the higher employer contribution rates of ‘up to 30 per cent’.  While I do not attempt to argue with this figure I believe that the way in which it is brandished around by members of the Government as an excuse to maintain the status quo is unfair to military superannuants for two reasons:
     while this is a cost to the Government as a former employer, it inflates the cost of providing DFRDB ‘retired pay’ when compared to the cost of providing superannuation benefits to other Australians; and
     it ignores the ‘compensatory’ component of military superannuation.

Recipients of DFRDB ‘retired pay’ contributed 5.5% of their after tax income towards the cost of their superannuation for a minimum of 20 years. Have you included in your costing of our superannuation the amount of money that would have accumulated if our contributions had been wisely invested in a dedicated fund, as is the case with current civilian superannuation arrangements? Further, around 75% of those who contributed to DFRDB discharged from the Service before completing 20 years. All they got back was their contributions – in other words they made an interest free loan to their employer. As this was a contribution to superannuation it is only fair that potential earnings from this source should also be added to the amount that would have accumulated if the contributions of service members had been invested in a dedicated fund. Why, Treasurer, should we be disadvantaged because a succession of governments did not have the foresight to set aside and invest money for our superannuation benefits?

Current private sector superannuation schemes require the employer – not the employee – to contribute a minimum of 9% of the employees wage or salary to superannuation. The employee has the option of contributing further from his or her before tax income, thus reducing the tax liability. The employer can also contribute additional after tax funds. Provided one remains within the concessional limits one can invest under current rules a total of $75,000 per year with earnings on the investment taxed at 15%. For anyone earning over $80,000 per year this is a 22% tax saving (or 30% for someone earning in excess of $180,000 dollars). Further, at the age of 60 accumulated funds can be converted to a Transition to Retirement Pension. Both the earning on this investment and income stream is untaxed. Compare this to the DFRDB income stream that remains taxed – albeit with a 10% discount on reaching the age of 60 – at the recipients marginal tax rate for life.

Add to this the fact that recipients of many private sector superannuation income streams receive some exemptions from the income test for Centrelink pensions – concessions not available to DFRDB recipients.

Mr Swan, the Government gives quite generous taxation breaks in order to encourage Australian’s to save for their retirement – concessions that were not extended to members of the DFRDB scheme. The revenue that the Government forgoes through these arrangements – arrangements that those on higher incomes are more able to benefit from – come at a cost to the government, as do the concessions granted in relation to incomes testing.

Mr Swan, I would appreciate you providing me with an analysis of the cost of military superannuation compared to private sector superannuation taking into consideration the points I have raised above. Only when this comparison is done can the generosity of the DFRDB scheme to the Australian Government be properly assessed.

Now to the matter of the compensatory factor.

The DFRDB scheme was designed to compensate the military member for the unique nature of military service. It was recognised at the time that military service bought disadvantage to both the military member and his or her family.

The service member is subject to frequent postings – every two to three years. This has a significant impact on the partner of the service member to accumulate their own superannuation and means that every two to three years the partner is required to find another job – if this is their wish. Further, the military member may spend considerable time away from home each year, leaving the partner to parent alone. The added difficulty of parenting under these circumstances may only add to the difficulty of the partner to find and hold employment, further disadvantaging the family financially.

The designers of the DFRDB scheme recognised that military families may not be able to purchase a house during the time the member was in the Service, that on discharge he or she may have to relocate, undergo further training to find a civilian job, or may be unable to find attractive and permanent employment.

It is easy to say, as Senator Feeney has, that ‘some 75 per cent of DFRDB members were under 45 years of age when they ceased service and 40 per cent of those were between 35 and 40 years of age’. When this statement is made, Treasurer, what consideration has been given to the difficulties faced by those discharging from the services, including economic loss incurred by the separated member in relocation, retraining and difficulty with finding employment and the economic loss of the partner in being unable to develop a career and accumulate his or her own superannuation funds compare to the partners of civilian employee?

I will appreciate your considered response to the above.

Yours Faithfully,

Ken Marsh

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