Keep politicians away from buckets of money

Last night Andrew of Randwick asked if it was a good idea to draw down the Future Fund rather than let debt blow out.

Short answer is “No”. There is a longer answer too.

I have written previously on the future fund.

The Future Fund is a complex beast because it combines two ideas, one good and one bad. Some form of compulsory savings vehicle is, on balance, a good idea.* Not because bureaucrats know better than private individuals how their own money should be spent, but because it reduces the temptation to operate Ponzi schemes – this is the situation where old investors are paid from contributions by new investors. This sort of scheme is common in public finances around the world and will become an ever-increasing burden on future taxpayers.

But the Future Fund is a sovereign wealth fund. On balance this is a bad idea. True, many countries have such things and appear to prosper. Yet they create temptation for governments to engage in wasteful spending. Government has a ‘have money will spend’ approach to public finance. We have seen this in Australia since the early 2000s and more so since 2007.

The Future Fund was established by the Howard government to provide for superannuation for Commonwealth bureaucrats. The Commonwealth, like the states and territories, had been an irresponsible employer. It had provided its employees with super entitlements, but had not funded those entitlements. In other words, it had been running a Ponzi scheme.

By making provision for Commonwealth superannuation liabilities before the burden became too large the then federal government was being responsible. Yet, at the same time, it set up a huge pot of money that could be raided by future governments and to that extent was being irresponsible. Perhaps it should rather have cut taxes. So the Future Fund is a mixed blessing depending on which aspects you want to emphasise.

So turning to Andrew’s question – the money in the Future Fund must be replaced by future taxation if it is used for purposes other than paying out superannuation claims. At the same time debt has to be paid out of future taxation too. So the burden of excessive government spending doesn’t change if the Future Fund is raided. The incentives politicians face, however, will change. Raiding the Future Fund will introduce a new source of fiscal illusion into our public finances and reduce the discipline that politicians face in their spending behaviour. That means more wasteful expenditure.

* I realise this is a very controversial view in our circles. The issue revolves around coercion. Right now I’m being coerced to provide for my own retirement. Something I’d do anyway. But I also know that other people would not. They are being coerced to provide for their retirement. If the government could commit to never coercing me to provide for other people’s retirement in addition to my own then compulsory super would be entirely unjustifiable. But as it stands it will reduce, on balance, the amount of coercion I will experience.

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11 Responses to Keep politicians away from buckets of money

  1. stackja

    Why does government need more and more money? Because many people keep asking government for more and more. Future Fund is for the future. The ALP past has given us a deficit. The present debate should be about cutting back government. But will the Australian people approve?

  2. Noddy

    >Future Fund is for the future<
    CRAP!
    The future fund is for the 'animals more equal than the other animals'… big time bureaucrats and career politicians. How was the 'future fund' established?
    From the sale of public assets paid for by the sweat of the Australian people.
    Get former Prime Ministers snouts out of the public financial trough.
    All the living prime ministers were failures… check the public record.
    You can add RBA governors to that, too!
    Joe Hockey will join the ranks of the other failed treasurers, Swann, Bowen, Keating, Costello, Hewson et al… all were lackeys of the International Finance cabal.
    You should read Jack Lang's book "The Great Bust: the Depression of the Thirties".
    This will give you some idea of the future we face and it is not necessary!

  3. Yohan

    I think it was very telling that the Labor government always quoted total government debt figures as minus the future fund total – to make it seem 70 odd billion dollars lower than it really was. They just saw the future fund as another pool of money to dip their hand into.

  4. JimD

    Apparently Gonski’s gonsky to ANZ and Costello takes over.

  5. .

    Net debt is a crock. What matters is the debt servicing costs.

    We are interested in what the cost is to GDP growth, not what Australia would look like if it were a firm that wanted to be bought out by a rival. We want to know the expense ratio od debt, not what the balance sheet looks like.

    What are we paying interest on debt for all three levels of Government? Why do we have so much counter cyclical spending even Keynesians can’t agree to? What is the rate of return on this debt fueled spending?

  6. Andrew of Randwick

    the money in the Future Fund must be replaced by future taxation if it is used for purposes other than paying out superannuation claims. At the same time debt has to be paid out of future taxation too. So the burden of excessive government spending doesn’t change…

    Message received and understood. Now what about those liabilities….
    .
    Just two stories as food for thought:
    My uncle recently died at 104 years of age. He had worked for a private insurance company and retired on a defined benefits scheme (i.e. multiple of last year’s salary for life). As you can imagine the actuaries must have been having conniptions as these old timers, due to improved medical care, just did not die off, as planned.
    My father’s best friend worked for the PMG and then moved to Telecom. I remember him being bitter in the late 1970′s (or thereabouts) when the union negotiated away the defined super benefits as a tradeoff for improved conditions for the current workers – retirees don’t vote in union elections!
    .
    All the Commonwealth public servants were promised defined benefits super as a different time and place, where they did not get paid as much and ‘real’ super (as opposed to pension schemes) was a set of golden handcuffs, e.g. Mum lost most of her accumulation because she did not do the full 30/40 years of service.
    .
    Now, what is the argument that the promises made by prior governments can be reneged upon? Paying someone a generous annuity for 20 years, is very different from paying for 40 years.
    .
    When can a government expose former employees to soveriegn and regulatory risk, i.e. yep that was then, and this is now and we have downgraded it.
    .
    P.S. I do note that Nicola Roxon, a young woman, seems to be on a $150k pension for life, with a NPV of several million.

  7. ar

    Right now I’m being coerced to provide for my own retirement. Something I’d do anyway.

    Leftism wouldn’t exist without compulsion.

  8. Sinclair Davidson

    When can a government expose former employees to soveriegn and regulatory risk, i.e. yep that was then, and this is now and we have downgraded it.

    I did once suggest that the Future Fund be devolved to individual members so that pollies couldn’t get their hands on it. But that would constitute a change to the public super system and couldn’t be done as it might constitute expropriation of an asset. Anyway that is how it was explained to me at the time.

  9. SomeGuyOnTheInternet

    I chuckle every time I think that Labor Treasurer Keating brought in compulsory super – turning every Australian worker into a mini-capitalist shareholder, while Liberal Treasurer Costello established the Future Fund, which essentially part-nationalises companies by buying their shares. The irony!

  10. .

    I chuckle when people are ignorant.

    Keating’s reform simply made low wage earners expensive to keep on. The initial rate was a pittance. He also imposed a regressive taxation regime on low income earner’s superannuation accounts.

    Virtually all households that needed one had some form of retirement scheme.

    The idea you need to save for super when you are young or trying to buy a home (also expensive because of excessive taxation) is just bizzare. Letting people buy less expensive dwellings under a lower tax regime is easier to administer and doesn’t require an army of paper pushers and union leeches with their absurd ‘Industry Funds”.

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