Wednesday, 30 November 2011

Facts About Public Sector Pensions

Today marks the largest strike in my memory, and perhaps the largest in a generation, and all on the subject of public sector pensions. I have noted that there is a lot of misinformation from both the Unions and the Government on this issue, so I thought I'd stick my oar in to dispel some myths.

Pension strikers.

Public sector pension schemes are viable in their own right.
This, I'm afraid, is utterly wrong. Public sector pension schemes are operated on what the Government Actuary's Department (GAD) refer to as a 'pay-as-you-go' basis. This basically means that the contributions paid in for current members go straight out of the door to pay for the pensions of people in retirement. The 'pension fund' does not actually exist - only on paper. In the private sector, such arrangements are referred to as Ponzi Schemes, and they are illegal.

Public sector pension schemes are, in effect, insolvent. The only thing that keeps them going is the fact that they are guaranteed by the taxpayer, who is liable for any shortfall. If they were forced to stand up on their own, they'd go bust.

Public sector pension schemes are unaffordable.
Again, this is total bollocks. They are heavily subsidised by the taxpayer, yes - but to say that they are unaffordable is a rather subjective statement. The NHS costs £115billion a year, and the annual benefits bill comes in at around the £190billion mark. We don't consider these unaffordable. The public sector pension schemes are subsidised by the taxpayer to the tune of around £23billion (GAD figures), which is a mere snip in comparison.

The Government could afford to continue paying for the schemes, if it so wished - it would simply have to cut other things instead. This is not an economic decision, it is a political decision.

The changes the Government is making are unfair.
Really? The taxpayer is subsidising these pensions by about £23billion a year, as discussed. That means that the taxes of people on minimum wage are being used to subsidise the very generous pension provision for public sector workers.

This may be a political decision, but that doesn't actually make it wrong. The changes the Government propose will not eliminate the public subsidy to these schemes, they will merely reduce it. In exchange, the scheme members will have to pay a bit more, accept a little less and work a bit longer.

It should be noted that, even after the Government's proposed changes, public sector workers will still have pension provision far in excess of what is generally available in the private sector, and it will still be subsidised by the taxpayer. What is unfair about that?

Public sector workers pay tax too!
Yes, they do. Everyone who has a job pays Income Tax and National Insurance. The point is, though, that a public sector worker's wage is derived entirely from tax revenue, which by definition has come from the private sector. The private sector gets its money through sales and competition, not just with people and organisations in this country, but throughout the world. Exporting goods and services is the exclusive preserve of the private sector, and brings money from other countries into the UK, making us all richer. It is this which is the ultimate source of all tax revenue.

People in the private sector have better pay than those in the public sector.
This used to be true, but isn't any longer. As reported by the BBC, using the Office of National Statistics as its source, on average, those in the public sector earn 7.8% more than those in the private sector. So the old deal of less salary, better benefits is no longer true - the public sector, on average, have better salaries AND better benefits, all funded by... you guessed it, the taxpayer.

We're facing a new age of union militancy.
I don't think so. Union membership is a fraction of what it was in the 70s and 80s, and labour laws are much tougher to make strike action more difficult. I think there are some in the union movement who long for the rabble-rousing days of old, but they're certainly not alone - I find it difficult to imagine that Cameron and Osborne aren't rubbing their hands with glee at this confrontation.

The private sector should have better provision, rather than the public sector having worse!
Yes, they should. But is it really up to the Government to dictate to private employers what remunerative packages they offer their employees?

The level of pension provision in the private sector isn't particularly good, but it is market forces that have driven it that way, combined with a general ignorance of the importance of long term retirement planning. The answer to the discrepancy is not simply to force the private sector to make more provision for retirement. Whenever there is coercion involved, it is effectively a tax, and tax strangles economic growth. Not really what we need to be doing at the moment, is it?

Personally, I can't see the Government's changes as unfair, in light of the generous subsidy and the poor level of provision in the private sector, and I think it's a bit rich of public sector workers to cynically strike to protect their own vested interests at a time when we're all suffering because of the economic conditions. However, having said that, given that the Government's proposals will only trim the public subsidy to the pension schemes in question, one wonders why they are bothering with all the fuss for the sake of a few measly billion quid. Far more effective measures would be:
  •   A 10% pay cut for everyone in the public sector earning more than £100,000 a year. There are around 38,000 people earning £100,000 or more in the public sector. This measure alone would save £3.8billion a year;
  • A recruitment freeze on public sector administration jobs for the next 5 years. Loss of staff through gradual turnover would make for a far more sleeker organisation, and is much better than top-down re-organisations. That's why it's favoured in the private sector.
Just a few thoughts.