As highlighted in Chapter 5, Treasury and successive governments believe that the purpose of the $300 billion Future Fund is to help finance the federal government’s unfunded defined benefit superannuation fund liabilities now officially estimated more than this dollar amount. Unfortunately, this official estimated liability grossly underestimates the actual future annual budgetary liabilities by discounting future CPI indexed pension payments by the bond rate.
As explained in detail in Chapter 5, this actuarial discounting method grossly underestimates the actual amounts payable presumably because of the assumption that the Future Fund will generate returns comparable to or more than the bond rate. Even if this is the case, which we all certainly hope it will be, there is absolutely no guarantee that the current or a future government will not divert the Future Fund assets to other more pressing needs.
Already many countries including Australia are facing a debt crunch resulting in sharply higher interest rates and debt funding costs. The Financial Times (8 September 2026) highlights “that many countries now spend more on debt servicing than defence, including the US, France, and the UK”. With both our federal and state governments continuing to run large-scale deficits and a gradual decline in the priority given to our defence outlays, as a country we are poorly prepared to go it alone if the priorities of our major defence partners change.
The automatic inflation adjustment of both our unfunded government super and social security system significantly complicates dealing with high inflationary periods and the associated higher interest costs. We already rely on personal income tax to provide almost half of federal revenue and have closed off the possibility of social security taxes by forcing employers to pay 12% compulsory super on top of state payroll tax usually at a further 5% rate.
What scope then do we have to deal with an unexpected situation such as a defence threat or a period of high inflation such as occurred in the early 1970s? Truly little especially if the economy continues to slow down. This is why we need to focus now on the role of our only readily accessible reserve the Future Fund. There are of course alternatives including income tax surcharges, one of Treasury’s favoured fixes in the past.
Increasing the GST tax rate would at once trigger disputes with the States who receive all the current tax collected. It, moreover, would soon increase social security and unfunded pension outlays because of the inbuilt automatic CPI protection. The government could also turn back the clock and reintroduce superannuation investment controls such as the earlier 30/20 rules requiring investment of at least 20% of portfolios to in Commonwealth bonds and another up to 10% of the portfolio in government or semi-government bonds.
Times of major financial crisis always place pressure on the exchange rate especially when foreign investors are large bond holders. The UK’s experience in funding the Second World War throws valuable light on the extent of the funding problems. Even with the huge U.S. Lend Lease help, funding the war effort required confiscation of large holdings of overseas assets owned by residents and companies.
The government funded these acquisitions by issuing long term bonds at low interest rates. During the war, these rates rose, reducing the value of these bonds, increasing the losses from the forced transfer of the assets to the government. Apart from the Future Fund assets, the largest superannuation funds hold between 30 and 40% of their assets overseas adding to the pool available in an emergency.
While we may never need emergency funding, our weak budgetary situation, combined with an emerging international debt situation calls for forward planning. Apart from the difficulties the growing budgetary cost of compulsory super is creating for managing the budget, the immediate transfer overseas of a considerable proportion of the new contributions adds to downward pressure on the currency. This is not a problem when things are going well but nevertheless will add to the budgetary management problems when the economy turns down.