Tuesday, 13 July 2010

Halligan on unfunded public sector pensions

Via The Cobden Centre, I discovered this latest piece from Liam Halligan:

Last week saw the publication of a compelling report by the Institute of Directors and the Institute of Economic Affairs – laying out a series of measures that would help rein in the potentially disastrous costs of a pension scheme that caters for only a fifth of the UK workforce.

The word "scheme" flatters what actually goes on.

Incredibly, the vast majority of UK public sector pensions aren't funded by contributions that have been invested and, over many years, benefited from returns and compound interest. If only.

So chaotic is the our system that most state workers receive occupational pensions paid for directly from current taxation.

That's why our public sector pension system is so vulnerable to changing demography, with the number of retirees growing and the tax base shrinking as the baby-boomers quit work. It is, in the words of the IOD/IEA report, an "unstable Ponzi scheme".

This I knew, but it seems the situation is even worse than I imagined:

Unsurprisingly, the IOD/IEA document sparked knee-jerk condemnation from some of the union leaders who profess to represent Britain's public sector workers. Ministers, apparently, "won't know what has hit them" if they dare to modify schemes designed 50 years ago and barely changed since even though life expectancy has risen by almost two decades.

As the report shows, many state workers who retire at 60 years of age – as the vast majority still do – will draw a final salary pension, paid out of current taxation, for longer than they actually worked. Any trade unionist who doesn't accept that this is financially insane is either innumerate or incredibly selfish.

Halligan tackles the common refrain that public sector pensions are "compensation for lower public sector wages":
As the IOD/IEA report says, "this cannot now be argued with any degree of credibility". That's because state sector wages are, on average, considerably higher these days than those in the private sector – especially outside London and the South East of England. On top of that, public sector employees work fewer hours, get more holiday and have much more job security than the rest of us. And far, far better pensions on top of that.
How much does it all cost?

The Government says total outstanding public sector pensions liabilities are equivalent to 53pc of national income. The IEA/IOD puts the true cost at 74pc of GDP. Towers Watson, a highly-respected group of actuaries, calculates total liabilities as no less than 83pc of national income – more than our national debt.

Remember, this liability must all be met out of current taxation and pays for the pensions of just a fifth of the workforce. And having attempted to hide the bill, Whitehall is increasingly trying to fund public sector pensions via council tax – paid by all retirees, of course, many of whom are struggling on denuded private sector pensions.

Our public sector pension system is imposing a massive burden on former and existing private sector workers – to say nothing of our children and grandchildren. And every additional worker the state employs increases that burden even more.
This is yet another reason that we need to drastically slash the public sector payroll.

I wholeheartedly recommend the full article.

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