The Financing and Costing of Government Superannuation Schemes
IV SECURITY
As described above, the most important reason for funding in the private sector is to provide some security for the members' benefits. The nature of this security needs closer examination. In a continuing scheme the members just receive their defined benefits. However, if the scheme is discontinued (eg because the employer has gone bankrupt) then the members lose their entitlement to a defined benefit backed by the employer and become entitled to a share of the fund assets instead. The proportion of fund assets allotted to each member will take account of their defined benefit expectations, but the amount of money available for distribution is simply the amount of money in the fund. Even in less extreme circumstances the members do not have any absolute security for the payment of their defined benefits. If the fund's experience is unfavourable then the employer may be unable to maintain the level of defined benefits, and some reductions may be necessary. In practice employers would normally try to make up any shortfall between the assets in the fund and the value of accrued benefits unless the cost of these benefits was threatening the viability of the employer.
While the external fund does give security to the provision made for members (because the assets are held in trust) it does not give security to the members defined benefits, as the continuance of these is dependent on the employer's ability to meet any shortfall. The essential idea is that the employer establishes a funding plan under which it makes contributions to the fund on a regular basis designed to finance the defined benefits for each member during their period of employment. This funding plan is adjusted on a regular basis in the light of experience. If the employer has to discontinue its planned funding then the members should get what has been contributed for them on the basis of the funding plan.
The existence of a fund does not guarantee the defined benefits, and if conditions are very adverse (eg a major investment downturn) then the members are relying on the goodwill and continued prosperity of their employer to maintain the defined benefits.
Government Ability to Pay
There have been doubts expressed as to whether the unfunded Government liabilities will be able to be afforded out of future government revenue. In effect, these doubts are similar to the doubts expressed over the possible future of other programmes such as the age pension. Moreover, they are exacerbated by the changing demographics of the country. These doubts have arisen most forcefully in respect of schemes for State Government employees - the governments of New South Wales, Victoria and South Australia have been sufficiently concerned about this to adjust their schemes and to move towards full funding in respect of new employees. The Queensland Government has for some time accumulated assets within its Consolidated Revenue Fund which are held for the purpose of meeting its superannuation liabilities.
It is certainly true that the mere existence of revenue raising powers does not ensure that future obligations can necessarily be met. Changes in technology and shifts in population can lead to a major decline in a revenue base that was once substantial. Thus for example local authorities have been vulnerable to shifts in population, while port authorities have suffered from changes in technology. In Australia, "the dominant revenue raising powers of the Commonwealth coupled with the large expenditure responsibilities of the State/Territory and local government sectors necessitates significant transfers from the Commonwealth to the other levels of Government". (1994-95 Budget Paper No 1 Statement 6)
The position of the Commonwealth, as a national government with very wide revenue raising powers, is therefore different from the other Australian Governments. Its revenue raising ability is essentially only constrained by the prosperity of the country. This is a significant constraint - for example, it is unlikely that the population would accept for any length of time a system under which the general population was very much poorer than those employed in government service. However, the management of the economy is a matter for which the Federal Government has responsibility, and this is much less liable to unforseen variation than a local authority or a particular authority which is dependent on a single trade.
If the economy as a whole got into serious difficulty, it is unlikely that advance funding would preserve the superannuation benefits of public servants. Such a major economic problem would inevitably be felt by all sections of the community, and the mere fact that persons in retirement had had savings made on their behalf would not protect them from the general consequences. Indeed, in major economic distress it is not uncommon for those who are dependent on savings to suffer much worse than those who are dependent on their earnings from their own exertions. In practice, the prosperity of retired public servants is likely always to be constrained by what the population of the country as a whole will accept for this group of people.
At the present time, there seems no reason to suppose that the future expenditure on superannuation for Commonwealth Government employees will place an unsustainable burden on the budget. It is presently around three percent of total government expenditure, and less than 1% of GDP. Moreover, as a percentage of GDP it is expected to fall in the next few years, and to stabilise at a rate which is less than half the current rate.
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