Woz this ‘ere Future Fund all ’bout then, dudes?

A couple of colleagues have been asking questions about Howard and Costello’s Future Fund. They were under the impression that it is some bucket of money set aside for the public good at some time in the future.

Well… chaps…, it’s nothing of the sort.

In short, the Future Fund is a bucket of money to be managed for the purpose of paying the Commonwealth Government unfunded Superannuation.

Gosh, that’s a mouthful. Before you all go to sleep from boredom, WozzItAwlMean?

  • The Commonwealth Government is the Feds. That’s the mob what’s in Canberra.
  • The Superannuation is the wodge of money paid to retired employees of the Federal Government. Superannuation pensions and lump sum super payouts.
  • The UNFUNDED part comes about because some (but by no means all) employees of the Government have a special type of super scheme called a “defined benefit” scheme – whereby they get a certain amount of money irrespective of how much they tipped in. More below.

Now for some more breakdown, details and analysis.

Who gets the benefit, and how, and why?

The money held by the Future Fund will be used to pay pensions and lump sum super payouts to former public servants, judges, and politicians who are in defined-benefit super schemes.

Erk – lost you again?

Public servants employed after about 1989 are not in a defined benefit scheme. In about 1989 or thereabouts, the old CSS (Commonwealth Super Scheme) was terminated for new entrants. From that time new employees are forced to join the PSS. The PSS the new super scheme, and it is a contribution scheme just like most private companies run.

Those in the PSS just get out of super what they put in, so new public servants after about 1989 are PSS members. Those PSS members do not, never have, and can never create an unfunded superannuation drain for the Federal Government.

The number of members of the old CSS is ever declining as those already retired die. There are many members and former employees (like me, for example) who have kept our CSS benefits. Imagine a 20 year-old in 1989 who stayed in the CSS. Now they are about 40. In another 20 years or so they will retire and take a benefit (payout).

Why did many stay in the CSS? Simply, the CSS benefits are defined as a multiple of your final average salary plus contributions made, so its a good deal! This is the unfunded part. The portion not paid by the members earnings has to come from somewhere, and that somewhere is government taxes.

So is the unfunded liability a big nasty problem waiting to bite the Government?

No. Never was, and because the number of people who need to be paid under the old schemes is declining, it will become progressively less and less a problem in future.

The important points to remember here are that:

  • The CSS had been running for many, many years and the amounts paid out were always manageable. The term “unfunded” is technically accurate but used effectively to create an emotional feeling of a bad, evil, never-ending drain.
  • One group of major beneficiaries of unfunded super systems are politicians, who have a different super scheme to public servants. Pollies are not in the CSS or PSS, they are in something different again. It was very generous until Mark Latham got some changes. As far as I know it is still a defined benefit scheme, its just less generous than it was. (I may be corrected on this point – it may have changed to an accumulation scheme).

Pretty much every economist, commentator, analyst or scribe who has looked at the Commonwealth superannuation liability has concluded that the Future Fund is not needed. Remember – the amounts that need to be paid out have been in decline for nearly 20 years and will continue to decline.

So why has it been set up?

The reasons are partly political and partly financial.

Let’s start with the financial, and move on to the more contentious part.

Part the first: It all comes down to Bonds.

A Bond is a financial thingy whereby you loan your money to the issuer of the bond for a fixed period(usually some number of years), and in return you are paid interest. At the end of the term the original money is repaid. Notice that bonds do not pay back more at the end to compensate for inflation.

Once upon a time, Governments used to fund major works, or just day to day expenditure, by issuing Government Bonds.

Because Governments rarely go bankrupt, the risk associated with a Government Bond is considered to be so low as to be negligible.

This has created a method of benchmarking financial products, and evaluating financial risk.

You simply compare against the 10-year Government Bond rate, which is considered to be a risk-free rate.

Therefore, anything paying less is silly, might as well buy Government Bonds. Anything paying more by definition has a higher risk.

Now the fun starts…

Mr Howard and Costello have run such large Government surpluses in the last few years that they are very close to paying off all of the Commonwealth Government debt.

This creates a conundrum for the financial markets – how to you price debt, and risk, and investments, when you have no Government Bond rate to compare against?

Solution: Don’t use all those surpluses to pay of debt, dump it somewhere else instead. But where, oh where?

Part the second: Politically, Howard and Cossie have the imagination of small dead ferrets*. The dosh could be spent on all manner of nation building:

  • Fancy a high speed rail system between Syderney, Melbourne and Canberra?
  • How about lower cost education?
  • Why not build some humungous pipelines from far north Queensland, heading south, to bring cheap water to the masses instead of expensive desalination plants?

And I’m sure you can dream up a few more.

But sadly, the powers that be in Canberra don’t want to spend anything on building a legacy for the future of the country. One has to wonder why.

So with all this money sloshing around there are two things that matter. Handing out tax cuts before each election (makes for a good poll result), and making DAMN SURE that if Labor get elected, they can’t get hold of it.

Suddenly, after months of hand-wringing by the financial sooth-sayers, the light-bulb moment occurred, something like this:

TING! (thats the light bulb turning on – use your imagination)

PC: Let’s make a fund, a special fund, where we can say the Government doesn’t really have the money any more. Let’s tip it all in there. Let’s invest it!

TING! (the second)

PC: Let’s use it to pay for super… all those aged evil public servants sucking at the public teat, we can palm them off and blame them for having to do this! And (shh) those pollies on their big post-parliamentary pensions. What a neat way of funding them!

JH: And look, it means it’s special money. Labor will get crucified if they try to raid it! Woo-hoo!

PC: And wow – now we still have Government Bonds and the financial marketeers can sleep easy.

JH: Noice one!

(Howard and Cossie give high-fives and sail happily off into the sunset)

———

* Small dead ferrets – with thanks to my uni fried Geoff who used this term whenever he possibly could.

2 Comments

A brilliantly clear analysis. Whyever don’t those highly paid financial journalists write something as lucid as this instead of cheering for the government all the time?
Now if Howard and Costello really wanted to do something sensible, they could announce a new major city to be built in the Kimberley area of WA. There’s more water than can ever be used, it’s close to Asian markets, almost unoccupied and could be a required place of residence for all migrants from Asia for at least 10 years [close to home and a similar climate]. In fact you could encourage controlled migration as a way of building bridges to our Asian neigbours. In addition, it places a sizable population in an otherwise unused part of Australia. Do you seriously think that our crowded neighbours to the North are going to put up for ever with such an unused resource so close to them?
Now THAT’S nation building!!

Comment by Dad | April 13th, 2007 11:57 pm | Permalink

Thanks Mr Dump.. things become clearer..

Dunc.

Comment by Duncan Margetts | April 14th, 2007 9:10 am | Permalink

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