The Future Fund of about $130 billion will be in a state of isolation for a maximum of ten years to prevent an impulsive search on its finances and a rocketing bill for years to come to protect the cost of benefit pension payouts of many public servants.
Scott Morrison revealed that he would delay drawing down on the fund at least up to 2026 so that the government can cover up the entire cost of the unfunded liabilities.
The action will demand the government to utilize an additional borrowings over the medium term to slightly pay for what will rise to an $8 billion annual cost to the taxpaying citizen.
During an exclusive interview with The Weekend Australian, the Treasurer stated that the Future Fund does not have, at this time, the sufficient resources to cover the absolute cost of the public sector pension payouts and that starting to reduce it from the legislated date of July 1, 2020, would exhaust the fund.
He stated it made no sense to reduce the Future Fund’s assets, which normally secures earnings for at least 7 percent annually when the government could borrow for hardly 2.8 percent.
Days out from delivering his second budget, Morrison stated, “I’m doing this to respect future taxpayers. A decade or 15 years down the road, the unfunded super liability issue would still be there. We want the Future Fund to be capable enough of performing the work for which it was set up.”
The conclusion received the support of former treasurer Peter Costello, which is now the chairman of the Future Fund. The chairman claims putting off the maturity date would enable the fund, which is the seventh biggest sovereign fund in the world, to increase to a predicted $300 billion by the year 2030.
Costello told The Weekend Australian, “Scott wisely decides to delay the drawdown to continuously increase the fund and supply for these liabilities right up until the year 2050. It is very wise. It provides the Future Fund the chance to create a long-lasting supply for all generations.”
Morrison stated that the settlement carried a lesson for Labor that the Future Fund was not there to provide funds for repetitive spending. The treasurer also said that if we are serious about not leaving an unjust burden on the future generation, then let the Future Fund do its work and do not touch it.
He also said that “A labor treasurer at a notion could raid the fund, and that would cost a lot for the future generations.” The resolution will add to both the budget shortage and to the government’s debt beyond the forward estimates.
However, Costello backed the decision to utilize medium-term borrowings to cover the interim accountabilities until the fund grows, reducing concerns that the government’s decision to trim its debt could stimulate it to tap into the resource at the earliest date.
The Anticipation Of The Decade
Costello stated, “If we were to delay draw down to 2026, we can anticipate that we could raise it to $300 billion by the year 2030. It will secure the cost of the entire unfunded liabilities and save tens of billions of dollars of the budget annually. It will also take all the responsibilities off from the taxpayer permanently.”
Morrison mentioned that the additional debt needed to cover the pension payouts would incur at a time when the budget was returning to surplus, and the comprehensive level of net debt was dropping. The December mid-year report papers illustrate that the net debt peaks at 19 percent of GDP (Gross Domestic Product) in 2018-19.
He stated that the price for the budget cash balance would reach $200 million by 2020 and 2021. It will arise because budget rules do not permit the government to book the unrealized profits on the Future Fund’s share and infrastructure portfolio.
Morrison and Costello have agreed to appeal to lower the Future Fund’s mark return of between 4.5 percent and 5.5 percent on top of the consumer price index as legislated, with these rates to be reduced by 0.5 percent.
Though the Future Fund has surpassed its target return over its first ten years of operation, the Ashe Morgan campaign gathered support by the extended fall in international interest rates.
With interest rates increasing, Costello has asserted that they can meet the measurable return by taking excessive risks with the investment portfolio. “It is still going to be a very challenging ruling but more realistic.” Costello verbalized.
He started the Future Fund in 2006 to allocate budget surpluses from the mining boom to help secure the cost of defined benefit public sector superannuation programs.
The last of these programs shut to fresh members in July, but the payouts do not maximize until the years 2049 and 2050, when they attain $20 billion per year, while the liability will not be entirely paid to opt until about the year 2100.
Morrison stated the Howard government had expected that, by the year 2020, the Future Fund would acquire enough capital to meet all pension needs. It fails to anticipate the $60 billion introductions to the fund and the sale of its current stake in Telstra would be the ultimate contributions from any government.
Modelling by the Parliamentary Budget Office illustrates that if the government commenced drawing down the fund from the year 2020, it would be drained by 2052 while the outstanding pension liability would remain at $250 billion.
The PBO (Projected Benefit Obligation) predicted that delaying tapping the Future Fund for just another four years would allow it to gather enough assets to meet the needed payout for the rest of the century.
Morrison stated that the government had decided to leave the Future Fund alone only during the four-year forward approximate period, but it was his “disposition” to permit it to sustain building its asset base for an unspecified period.
During which the government needed to keep the versatility to utilize the Future Fund resources in case the rate of change will skyrocket. Morrison also stated that the budget’s projections for medium term will only display the government borrowing, instead of using the Future Fund to pay superannuation.
“Until they hear more from us, their presumption should be that the Turnbull government is not touching the Future Fund,” he verbalized. The resolution to decrease the fund’s target return indicates a concern that the investment perspective will become a lot more difficult as global interest rates start soaring.
The extended fall in global interest rates since the Future Fund started operating has created enormous profits for investors in bonds, while the Future Fund had a tiny investment in shares at the time of the international financial crisis and had made significant gains from the equity market recovery.
Costello argued that allowing the minimum mark return at 4.5 percent more than the expansion rate would force the fund to take unreasonably risky investment choices. The 0.5 percent cutback still leaves the fund at risk to a rise in global rates. However, Morrison stated he was confident that Costello would reach the goal.
Morrison said, “The fund has an excellent history of surpassing their target, and so we have real confidence in Peter and the fund to hit its goal, and I have no doubt that Peter will tell me when he has surpassed it.”
Future Fund would perhaps need a couple of years without the government raiding and interrupting their process for them to completely cover all the superannuation for years to come which is very beneficial for the future generations.