By John Fraser
A rapid rise in SA government spending will trigger a chain of events, culminating in the erosion of the value of your pension, leading economist Mike Schussler has warned.
He was (Tuesday) addressing a media briefing at the SA Institute of Race Relations (SAIRR), a leading independent think-tank, on an ANC plan to force financial institutions to channel a greater share of their assets into certain government instruments.
“The problem is that the government cannot stop spending,” he argued.
“(Rating agency) Moody’s must be pretty pissed-off. They have been lied to so many times. Moody’s will downgrade us in March or November next year. All the other rating agencies will follow (with further downgrades in their own rating profiles)”.
This was the second time the SAIRR had hosted a media briefing by Schussler on the same topic, and he fretted that within months the likelihood of pension pillage has grown.
“The expenditure rate of government has been increasing, partly due to the bail-outs of SOEs,” he noted.
“Annual government interest payments are at 4.8% of GDP, from 2.2% in 2009/10.”
He suggested that the seemingly inevitable downgrade of South Africa to junk status by Moody’s will lead to a leap in interest rates, which will, in turn, push the government into a swoop on pensions and other savings.
“I guess this will be within a year from the rating downgrade. If we get a final downgrade in March, it will take a year,” he predicted.
“They are going to be looking for funds,” he warned, noting that “SA has one of the largest pension pots in the world.
“Will we run to the IMF? No, we will run to our pension funds.
“SA has the 10th largest pension pot in the world in dollar terms. This is huge.
“The value is around 90%-100% of GDP. If you add insurance and medical scheme assets, you get to 160%-170% of GDP.”
Schussler, who is CEO of economists.co.za, noted that SA’s debt-to-GDP “trajectory has changed tremendously.”
This has increased the likelihood of further pension pillage, through the mechanism of prescribed assets.
“You (the State) need to get hold of assets that (will then) have to invest in government debt, to help lower interest payments,” he predicted.
“You are being screwed by highly-paid civil servants,” he noted, referring to the inflated public sector pay rates.
“This means there is less money for dams, schools. The next problem is medicine and textbooks at school.
“They are not going to do enough about the public wage bill. It is very likely that prescribed assets are the easiest way out. It is already ANC policy, and (provided for in) the law.”
He suggested that returns on pension funds and other savings will fall if a greater share of the pot is defined as prescribed assets.
This will have a downward knock-on effect on the value of pensions while also making medical aid more expensive and less affordable.
“The JSE will take a hit,” Schussler warned. “This will destroy the big financial firms.
“Asset managers are scared. This is why they aren’t talking publicly about this.
“I want the assets in my pension fund to grow, but there will be a social problem if this doesn’t happen.
“Things will get worse if we don’t get the returns we need.
“Our danger is in not addressing the fundamental overspending and growth issues that SA faces,” he concluded.