From the TUC

Defending public sector pensions

31 Jul 2009, by Guest in Pensions & Investment, Public services

Public sector pensions are under sustained attack. Hardly a day goes by without a claim from an employer group, opposition politician or right wing pressure group that they are unaffordable, out of control and unreformed. Worse, they often go on to suggest that there are quick and easy savings to be made by cutting or changing pensions in the public sector.

It is normally those of us who believe in a more equal society who are accused of the politics of envy. But there is a very definite attempt to stir up jealousy among private sector workers of fat cat pensions in the public sector. The trouble is that the arguments used are at best misleading and at worst scaremongering nonsense.

Of course it is true that public sector workers get better pensions that most people in the private sector. But that is no profound insight. Anyone with an employer backed pension wherever they work gets a better deal than the average private sector employee as nowadays most are not building up an employer pension.. The solution to our looming pensions crisis is hardly to cut the pensions of those who can look forward to a modest post-retirement income.

So why don’t the antis’ arguments stack up? First is what I call the final reminder fallacy. The game here is simple. Calculate some estimate of future public sector pension liabilities and then express it as if it were a final reminder bill which will have calamitous consequences if it is not paid with 28 days. But pensions are not paid in advance. These figures include pensions being built up by public sector employees now in their twenties, many of whom will still be drawing a pension in seventy years times. Any attempt to work out continuing public expenditure on any budget head for more than three decades into the future, and express it as a sum that has to be paid today will produce a big scary number.

Second come the out-of-control claims. Normally public sector pensions critics glibly ignore the contributions made by public sector employees and employers – even though they cover most of the cost of the pensions in payment each year. But the difference between any two relatively equal big numbers can jump around sharply from year to year. The cost of pensions is linked to increases in price inflation while contributions are linked to the public sector wage bill. Over time these both move in the same direction. But from year to year they are often out of sync. Perversely a government that holds down public sector pay one year may save a substantial amount, but it makes the cost of pensions bigger that year as a pay freeze is also a contributions freeze.

But the amount that governments have to find to pay public sector pensions does not leap around  and is affordable. At present the cost of pensions in payment is around 1.5 per cent of GDP. Not surprisingly in an ageing society this will go up slowly – rising to 2 per cent over the next twenty years but then, according to Treasury forecasts. it holds steady. But this is part of a wider pattern of changing public spending. Health and long term care costs will also increase – and are greater than public sector pensions.

Next come the fat cat claims. Of course a very few well-paid public servants with long service records will retire in some comfort, if not to the standard expected by Sir Fred Goodwin. But unlike the special schemes common in top boardrooms, top public servants (other than special cases like MPs and judges) are in the same scheme as their staff. The chief constable is in the same scheme as the constable. And average pensions are modest. Most public sector pensions in payment are less than £5,000. In the biggest scheme, local government, the average is £4,000 and for women £2,000.

What about the easy savings? Of course schemes can change. Indeed schemes have been renegotiated in almost every public sector scheme in recent years to reduce their costs and deal with longer lives. But pensions in payment cannot be cut without breaking promises made to staff in return for joining their schemes (and the law too). Changes to schemes inevitably take some time to deliver savings.

Particularly strange is the call to replace unfunded pay-as-you-go public sector schemes with defined contribution schemes. This would be immensely expensive for decades. At the moment contributions made by public sector employees and employers all go to paying pensions of those who have already retired. Introduce DC and the tax payer has to start to fund the whole of current pensions in payment while contributions are diverted to building up a fund to pay future pensions.

This would give us the absurdity of the state paying a fund manager to take these contributions and lend at least part of them back to the government. Not only would the government have to pay interest on this, but it would need to borrow other money to make up the sudden big hole in public finances caused by the diversion of pension contributions into a DC fund.

Public services provide the glue that holds a civilised society together. They are inevitably labour intensive, and paying their staff properly (which includes a pension) will not be cheap. But this does not mean that they are unaffordable. Nor is the solution to the private sector pensions gap an equality of misery, where every retreat from a decent private sector pension is matched by an equivalent public sector cut. Instead we should be levelling up, with decent pensions for all.

2 Responses to Defending public sector pensions

  1. Tax Research UK » Defending public sector pensions
    Aug 1st 2009, 11:37 am

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  2. Defending public sector pensions | called2account
    Aug 1st 2009, 12:20 pm

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