The focus of today's attacks are the "pay-as-you-go" (PAYG) public sector pensions run by central government (and not the Local Government scheme).
First Nick Clegg and now today’s papers have launched a fresh onslaught on ‘gold-plated’ public sector pensions on the back of yesterdays’ Office of Budget Responsibility report – even though the OBR small print shows that the forward costs of public sector pensions are sustainable. The focus of today’s attacks are the “pay-as-you-go” (PAYG) public sector pensions run by central government (and not the Local Government scheme).
PAYG pensions do not have a pension fund invested in shares and other assets as private sector schemes do. Instead employee and employer pension contributions are kept by the Treasury and pensions are similarly paid out of current public spending.
But in other ways they are run like a private sector scheme. There is a notional pension fund for each scheme within the public accounts. It is valued on the same basis, and the contributions that employees and employers have to make are calculated by actuaries in a similar way to those in other schemes.
Much of today’s outrage is about a figure called the net cost of public sector pensions. This is the difference each year between the cost of pensions in payment and the income from contributions. There is no reason, however, why in any one year these should balance: contributions are paid by staff and their employer to fund their pension when they retire, while pensions in payment have been funded by previous contributions.
There is also a contribution from the Treasury because the tax-payer has enjoyed the benefit of earlier contributions. If public sector pensions were funded in the same way as the private sector, contributions would have been put in a separate fund and invested.
Instead these public sector contributions are kept by the Treasury and provide funds that would otherwise need to have been raised through tax or borrowing. It is only right that pension savers should receive some return on their savings in return. Of course both pensions in payment and contributions are both very big numbers, so a small change in either can make a big difference in the net cost figure from year to year.
This is what the government has done by freezing public sector pay – and cutting future public servant numbers. The income from contributions depends on the numbers of public sector staff, their pay levels and contribution rates. Cuts to the public sector therefore hav the effect of reducing future pension contributions as fewer people will get smaller salaries.
This has the perverse effect of increasing the figure for the net cost of public sector pensions. Spending stays the same but income goes down – even though the state is spending less on the public sector workforce. On the other hand if the pay of every public servant was to go up by 10 per cent, there would be a big fall in the net cost of pensions as contributions would increase even though the wages bill would have grown dramatically.
So how can you accurately measure the cost of public sector pensions into the future? The Treasury, the National Audit Office and even the OBR report agree that the most useful figure is the proportion of GDP expected to be taken by pension payments.
The OBR have a new projection of the future cost of public sector pensions on this basis, which has been ignored today. Here are its projected figures taken from para 5.26 of the costs of paying public sector pensions (ignoring contributions) as a % of GDP. This figure looks to me as if it has been has been revised downwards from previous HMT estimates:
| % of GDP | 2010 | 2020 | 2030 | 2040 | 2050 |
| Public service pensions | 1.8 | 1.9 | 1.9 | 1.8 | 1.7 |
This is of course only the latest onslaught on public sector pensions. There have been many in the past yet as the NAO report shows public sector pensions are modest and affordable:
• Employee contributions to these schemes have increased faster (56%) than pension payments (38%) since 2000;
• There has only been a 2% real terms increase in the average pension in payment since 2000 – the average teachers’ pension has actually fallen by 4% over that period and the NHS average pension is unchanged;
• The vast majority of pensions in payment are modest. Most pensions paid in both the NHS and civil service are below £110 a week – and a quarter of NHS pensions are less than £40 a week and a quarter of civil service pensions are less than £60 a week. The biggest number of both NHS and civil service schemes is between £1,000 and £2,000. 14% of NHS pensions lie in this range. These pensions then drop away from this early peak; and
• Fewer than 0.2% of teacher pensioners, 1.8% of civil service pensioners and 2.5% of NHS pensioners get pensions of more than £40,000.
20 Responses to “Misplaced outrage over ‘gold-plated’ public sector pensions”
James Fearnley
Not normally a fan of more left or right leaning politics but http://bit.ly/dCABJB this piece on public sector pensions is worth a read.
Will Straw
Hi Fat Bloke,
The “structural deficit” is the part of the deficit that is not caused by the recession (ie excluding the drop off in tax receipts, increase in unemployment benefits, and bank bail outs). The Treasury calls it “cyclically-adjusted”. One measure is the surplus on the current budget which the OBR now estimates is -5.3% of GDP this year falling to -1.6% in 2014-15. Another is net borrowing (ie including capital costs) which is 8.0% this year falling to 2.8% in 2014-15. Both are up marginally (but only marginally) on the figures in the March Budget.
Best wishes,
Will
Fat Bloke on Tour
Will
Thanks for the response.
My issue with the concept is how elastic it can be to generate the number and then how dogmatic people become about the number and they try to tailor policy to deal directly with an “elastic” number.
The FT “Money Supply” blog has a couple of good articles questioning both the accuracy of the figures, the arbitrary nature of some of the calculations, the variability of the size of some of the inputs and the desire to target such an amorphous concept.
I personally think that the “structural deficit” is the new voodoo economics for dog boilers, it serves its purpose by scaring the troops and making Sniffy’s “Slash and Burn” agenda the only game in town.
Consequently I think that the concept needs to be investigated more thoroughly and the algorithm behind it better defined. The OBR seemed to generate their new number by making a big change to the “spare capacity” number in the economy.
Credit Crunch / Going in position = 3-4% deficit more than covered by net investment.
My view on this would be a structural deficit at or around zero.
The economic cycle is very indistinct as GB’s work had smoothed the normal pattern.
The necessary splurge had stopped, spending growth was put at 1.7% real in an economy expanding at 2.5%.
Credit Crunch Recession = 6.2% drop in GDP.
Deficit is a lagging indicator = Peaking at around 11.1% of GDP including a 3.5%’ish of GDP net investment figure in 2009/10 with something similar but slightly smaller this year.
Given the steep falls in government revenue and the increase in benefits being paid out we cannot be seen to have a “structural” that is non cyclical deficit anywhere in the region of 8%, even 4% would seem to be a dog boilers view of things.
The OBR view of 8% seems to be tied in with a view that the economy is currently working with 2% unused capacity, again this figure seems nuts in relation to the world as reported in the media and what I know and see.
Given that one way of looking at the output gap would be the 6.2% actual drop plus the long term growth rate times the length of the recession, a figure of 10/11% could be justified.
This bare number needs attention, people have talked about the froth on financial services and how this will never be recovered. But 8/9% froth seems ridiculous given that the City has got back onto its feet using state money and is now getting up to speed with its speciality – coin clipping. Cheap jibe I know but please tell me I am wrong.
Also all the talk of the growth rate being lowered because all the “Jam Rolls” / EU workers are heading home seems a bit pessimistic. Lots are staying and more will come back if the recovery takes hold. Add in the general political consensus to put a fire under the economically lost, lonely and the bewildered means that the supply side will improve internally as well as recover externally.
Consequently I think that all this talk of the structural deficit is wide of the mark.
We do not know exactly what it is.
We do not know the size of it or what size we should expect it to be.
Yet economic policy is being built around it?
I fear another 1976 IMF moment being forced upon us.
The Treasury is playing fast and loose with the “actuality” to colour its forecasts to the world so that the dog boilers have a good nail to hang their “slash and burn” agenda.
I think the Treasury is playing politics with numbers it is giving out.
I think AD was too close to the Treasury view he was given.
He was given very “cautious” numbers and like the cautious Edinburgh lawyer that he is, he went double cautious into the budget.
Please look at the Treasury deficit forecasts that were put forward over 15 months for 2009/10, they have a bend on them that Beckham would be proud of. Coincidence, I think not.
Consequently can you work on this?
Please note that in G1, you can be one of the following:
Jam Roll / Hamilton Accies / Currant Bun / Jungle Jim …
The only realistic alternative would be a Partick Thistle supporter.
Interestingly quite a few Jam Rolls / Hamilton Accies are in fact Jungle Jim’s through football allegiance.
After last season “we” are all still in mourning.
Beaten by LBG FC and a useless board.
ruharidh smyth
I have read the many articles published over the last few days about public sector pensions. Having worked for 30 years in the public sector I have always planned and worked on the basis that my pension will be reasonably sufficient to provide in my retirement. My partner works in the private sector so I am well aware of the issues and inequalities that can be seen to be between private and public sector. The reality for my family is that my pension will be subsidising the lack of pension provision from the other side too. To take that away after 30 years of working for it is simply not ethicial or fair. I am realistic enough to see that it is necessary tomake changes but it is simply not right to take away a benefit that was signed up for 30 years ago, yes change is needed but that should be for future benefits not what has already been worked for. not all public sector pensions are the same either so it needs a little less emotive ideas from people who are simply not in possession ofall the facts. We should not forget we are in this mess due to the private sector i.e banks making an almighty mess of things for all of us. is it then fair to punish hard working working class people who do not have the luxury of the background of nick clegg or david cameron to fall back on.
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