Sunday, 24 May 2020

Recovery bonds

How governments address funding  of the forthcoming fiscal stimulus  is yet to be seriously tackled. My last blog Staving off recession concluded with the observation:

The future will be one where if governments aren’t directly funded by the RBA, the RBA will own some government debt. And that should include State government debt. Money owed to ourselves won’t be a burden. It’ll be our salvation.

Bill Kelty former Australian Council of Trade Unions (ACTU) secretary and former Reserve Bank board member, was reported to be working on a recovery plan.

The Saturday Paper in an article titled Finding agreement on economic fix reported:

"Kelty’s recovery plan would see the government issue “national recovery bonds”, to be bought by the Reserve Bank, which would then sell them into the market, primarily to the superannuation funds.

“Our $260 billion extra deficit is fundable by the super funds relatively easily,” he says. “If the Reserve Bank buys them, and then the super funds buy them, they’re still only 8 to 10 per cent of their total assets. Earning 2 per cent."

“It doesn’t reduce the performance of the funds, who are long-term investors anyway,” he says.

There was a time in the early 1980’s before the era of tax on superannuation contributions, self-managed funds’ tax on earnings could be minimised by compliance with a 30/20 rule. This meant 30 per cent of assets had to be held in the form of government or semi-government securities. Up to 20 per cent could be semi-government securities, such as Telecom bonds (pre-Telstra float).

Not everyone shares the triumphant view of our current superannuation system as do two of its designers Bill Kelty and Paul Keating. As Leith van Onselen from Macrobusiness often observes, for example from a post on 29th April:

 Clearly, the compulsory superannuation system is already worsening income inequality. Moreover, the poor targeting of concessions towards high income earners means that superannuation costs the Federal Budget far more than it saves in Aged Pension costs, as confirmed by the Henry Tax Review, the Grattan Institute and actuaries Rice Warner.”

There’d be a lot of whingeing from super funds if there was a mandatory requirement to hold a percentage of their assets in the form of government bonds (including State government bonds).

However given the enormous concessions already granted to the superannuation industry it’s not a big ask. It would help close the inequality gap.

Government debt held by super funds will not burden future generations. After all, the Australian government underwrites the entire retirement income system via its unfunded scheme known as the Age Pension. Any payments by government to super funds  in respect of bonds (interest or redemption), would simply form part of a fully integrated retirement income system.


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