Wry & Dry

Sleeping super problems for we-the-taxpayer

Australia's fiscal ship is holed below the waterline.  And the people elected to fix the problem (the whole parliament, not just the government, because we have a recalcitrant Upper House) are squabbling over the best way to plug the hole.

Meanwhile the ship is listing.

And now another hole appears.  The rapidly increasing unfunded pension liabilities of senior public servants.

Two people for whom we-the-taxpayer should be thankful.

Firstly, to former Treasurer Paul Keating, for, inter alia, creating the superannuation revolution in Australia, essentially opening it up to all Australians.  And for encouraging defined benefit superannuation funds (onus on the employer to fund the scheme) to become defined contribution funds (onus on the member).

Secondly, to former Treasurer Peter Costello, for, inter alia, setting aside funds (the Future Fund), from essentially the first mining boom, to finance the future liabilities of the public servants who remain in defined benefit schemes.

So far so good.

But two problems have arisen.

Treasurers following Costello have not contributed one further cent to the Future Fund, to  keep up with increasing liabilities.  Labor Treasurer (for almost 6 years) Swan was into instant fiscal and electoral gratification.  Liberal Treasurer Hockey had to do what Peta Credlin told Tony Abbott to tell him; and that didn't include superannuation matters - for anyone.  

And Liberal Treasurer Morrison is now left with not only the main fiscal hole getting bigger, but also the new superannuation hole that has opened.

The Future Fund has assets of about $120 billion.  The unfunded superannuation liabilities of the federal government are expected to be $195 billion by 2020.  The gap will increase considerably by 2050.

And that gap must be paid by we-the-taxpayer.  What's worse, after 2021, the government of the day can use the Future Fund for spending on things other than superannuation.  See elsewhere in W&D for the Marshmallow Test.

W&D now swings readers to that small (3m people) Caribbean nation of Puerto Rico.  Well, it's not really a nation, but a territory of the United States (i.e. Obama is its President).  It's a bit complicated, but the Puerto Ricans (who are US citizens but cannot vote in US elections) want their territory to become a fully fledged state of the Union (such as Hawaii and Alaska became in 1959).

Well, statehood might a fine idea.  But Puerto Rico is poor.  Very poor.  And fiscally broke.   It has public debt of $72 billion, some 102% of GDP, but it is rapidly getting worse.  And it cannot pay the interest on its debt.

PR

But wait, there's more.  It's government pension fund has liabilities of $45 billion.  But assets of ...$2 billion.

But wait, there's even more.  Of the $2 billion in assets, over $1 billion is in loans to members, in the form of mortgages and, wait for it, personal loans.  Including loans of up to $5,000 for 'cultural travel'.  Nice work, if you can get it.

The fight now going on is between those who have lent the $70 billion to the government (i.e. bought bonds), who want their money back; and the government employees, who have been promised a whole lot of things ($45 billion) by a government that is broke.  

The former have, being US money managers and hedge-funds, done what W&D would expect them to do: lawyered up.  This will end in tears.

The takeaway?

The Australian government's unfunded pension liability problem is no where near as bad as Puerto Rico's.

But only by using extreme examples of what the end-game looks like can people begin to understand how big the problem will be if left unchecked. 

Read the article on the Marshmallow Test and see if you think our government would pass it.

W&D is not optimistic.