Every household in Britain faces a bill of £47,000 to meet the cost of public pension liabilities says the Mail. Except of course they won't. It's meaningless.
The small-state right face a big problem in the UK. Public services are popular. “Tea Party” activists may dub an extension of insurance based health in the US as creeping socialism, but UK voters much prefer the fully socialised version that is the NHS. So instead of attacking public services head-on, they have taken to attacking the people who deliver them.
They want us to think that they are all pen-pushers enjoying record pay levels and retiring on gold-plated pensions. The aim is to stir up resentment among private sector workers – nearly two in three of whom are not in an employer backed pension scheme, as employers have walked away from providing not just decent pensions, but any at all.
With its customary elan, the Daily Mail brings these themes together today in its latest shock horror expose:
“Your £47k bill for public pensions: The soaring cost to every family of state workers’ retirement”
Every household in Britain faces a bill of £47,000 to meet the cost of public pension liabilities we are told. Except of course they won’t. This is an entirely meaningless figure. But as few people understand how their own pension works, let alone the arcane detail of the so-called unfunded schemes that make up the bulk of public sector pensions, it is extremely easy to conjure up scary big numbers.
Four big public sector schemes – teachers, armed forces, civil service and NHS – do not have a discrete pension fund with its own investments. Instead employee and employer contributions are paid directly to the Treasury, who in turn pay out pensions. This is why they are called unfunded schemes – or more accurately pay-as-you-go schemes as they do have notional funds contained within the public purse (and fully reported).
This is good for taxpayers as they have had the benefit of all the contributions paid over decades which until recently has been less than the pensions paid out; in effect public sector workers have been lending their pensions to the taxpayer who have not had to borrow or raise in taxes the amount they have contributed over the years.
In return the Treasury now makes a relatively small contribution – the equivalent of the return on investments the funds would have gathered in if they were invested in the same way as other pension funds.
Working out the costs of meeting future pensions is important. It helps inform the SCAPE process that the Treasury sets for calculating the appropriate pension contributions that public sector employees and employers should pay. But presenting them as if they were a bill that has to be paid now is absurd. These are commitments that have to be paid decades into the future and will be offset in any case by future pension contributions.
Presenting future commitments in today’s money is not a simple process. It depends on something called the discount rate – a kind of interest rate used to express future bills as they had to be paid today. With spending going many years into the future small variations in the discount rate can make huge differences.
But while the small-state right obsess about which is the best discount rate to use – surprisingly they favour ones that make the cost look as high as possible – this tells us nothing at all about whether future pensions can be afforded. This is because we are not setting aside money now to pay these commitments and relying on future interest payments to help meet the costs.
Instead the costs will be met from the state’s current income each year. This is why the Treasury works out whether pensions are affordable by looking at the likely share of GDP that they will cost as the tax take largely depends on GDP. Currently public sector pensions take up 1.7 per cent of GDP. That rises to 1.9 per cent by 2018, but then falls back to 1.7 per cent by 2059 – a small increase, but that is hardly surprising in an aging society.
As the National Audit Office says in its latest report, “this report focuses on cash payments because”:
• Projected cash payments are considered by the government to be the most relevant measure of the cost of UK public sector pay-as-you-go pension schemes over the next fifty years;
• Projected annual cash payments can be related to estimated annual Gross Domestic Product as a measure of the country’s ability to pay;
• Cash projections include pensions expected to be earned in the future, and are useful for decision-making about changes to schemes, whereas liabilities represent only pensions already earned that would be unaffected by scheme changes; and
• Liability calculations can fluctuate substantially because of changes in one significant assumption, the discount rate, which does not affect cash payment projections.
Very few public sector pensions are generous. The median pension from the four big schemes is a little over £5,000, and, while teachers do better because they are more likely to have good careers on a professional salary, many other public sector pensioners get relatively small pensions.
As for the oft-repeated Mailism that public sector wages have overtaken private sector wages this is simply not true. The public sector workforce is much more skilled and more professional than the private sector workforce – and has become more so. The median hourly wage in the public sector has been higher than in the private sector since at least 1984 when appropriate statistics start.
And if you don’t believe the TUC on this, try the Institute for Fiscal Studies.