Calls to liquidate $250bn Future Fund

A think tank has advocated the “economically responsible action” of liquidating the Future Fund to pay down current $895 billion government debt, which is projected to reach some $923 billion at the end of the 2024 financial year according to the most recent Commonwealth budget forecast.

Dimitri Burshtein from the Centre for Independent Studies noted the fund is the 10th-largest Commonwealth expense by function, with an opportunity cost of maintaining it at some $10 billion per year, which is the interest paid on $250 billion of extra government debt at the current cash rate. 

“Put another way, the Future Fund need to generate 4.1 per cent returns after costs to just break even, and to break even on a cash basis only,” he said.

According to Burshtein, the economic case for the fund’s continuing existence has eroded since it was established in 2006.

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It was initially seeded with the proceeds of the Commonwealth’s 2006–07 budget surplus, joined later by the proceeds from Telstra’s privatisation. 

The fund has since been given investment mandates beyond its original unfunded superannuation liability purpose, also managing funding around areas like droughts, medical research, and disability care. 

“The purpose of the Future Fund was to finance or prefund the Commonwealth’s unfunded superannuation liabilities, which at the time was the largest liability on the Commonwealth’s balance sheet,” Burshtein said.

“The superannuation liabilities for four Commonwealth superannuation schemes were either completely unfunded or only partly funded requiring payments to beneficiaries on a ‘pay-as-you-go’ basis from the Commonwealth budget. This imposed the cost of financing liabilities accrued in the past onto taxpayers of the day. 

“Although there are now several other ‘Future Funds’, the stated objective of the original Future Fund was to fully underwrite these unfunded superannuation liabilities by 2020.”

In 2005, the Commonwealth’s unfunded superannuation liabilities were forecast to be $140 billion by 2020. But according to the Australian National Audit Office, the figure was shy of 2.5 times the amount at $322 billion at 30 June 2022.

Given increased life expectancy, coupled with Australia’s current inflationary environment driving superannuation indexation, this liability will likely increase significantly again when next assessed, Burshtein said.

He observed that the balance of the Future Fund as at the end of March 2023 was sufficient to meet the 2005 forecast but nowhere close to meeting the 2022 figure.

Additionally, while Future Fund’s cash returns have historically exceeded their cost of capital, he questioned its ability to continue to do so in the future. It has generated an average annual 7.7 per cent return since inception but its most recent 12-month return was 1.1 per cent, below the cost of borrowings.  

While a positive absolute return, it was still an economic loss for the Commonwealth, Burshtein noted. 

“There may have been a case for the Future Fund when the Commonwealth’s debt position was net negative. It may possibly have been the case for the Future Fund when interest rates were near zero,” he said.

“But neither of those conditions hold any longer or are likely to reverse in the near to medium term. Meanwhile the opportunity cost of the debt is born by the budget and the benefits accrue to the funds.”

He suggests that, by closing the fund, Australians will have a much clearer picture of public spending and the Commonwealth will have a lower interest expense in the budget. 
“A future without the Future Fund is a more viable one,” Burshtein said.