Defending public sector pensions | ToUChstone blog: A public policy blog from the TUC.
Common sense from the TUC, inclduing:
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.
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Whether public sector pensions or the gap between public and private pensions are too high is not really the point (although I happen to believe both are true), the point is there is resentment from many in the private sector that their taxes are being used to increase and secure the gold-plated pensions that exist in the public sector whilst their own defined contribution plans are losing value.
In my two years working with the council, on a wage about 20% below average, I managed to amass a pension pot which I’ve roughly calcuated is worth about £10k in net present value terms. Although I’m the beneficiary of it, I can still acknowledge that it’s ridiculous.
Having public sector workers retire on two-thirds’ final salary when they are likely to have no mortgage and no dependents is simply crazy. Their dispensable income is likely to be higher than that of a working person! If the retirement age is not raised pretty damn quick it is very likely that in thirty years’ time when life expectancy is 90 years then most people will be spending ((90yrs-60yrs) + (18yrs-0yrs)) 48 years, or over half their life, economically inactive. Again, completely unsustainable.
The TUC’s reponse is essentially (and predictably) do nothing. Just like the Royal Mail’s union in reform of the Post Office.
Current public sector pension arrangements are a highly irresponsible way to fund public services. They allow us to consume services now and pass the cost of them on to future generations. Salaries have to be paid out of taxes paid today; unfunded pensions have to be paid out of taxes paid in future years. It’s no surprise that governments which tend to fund today’s expenditure by using debt which gets passed on to future generations will also try to pay for public sector staff by offering higher pensions in order to keep salaries lower.
If we want services today, we should be responsible enough to pay for them ourselves, which means funding contributions into private pension funds for public sector employees, rather than expecting future generations to pick up the tab.
Peter
You clearly don’t understand pensions
The wholly misleading form of the private pension contract cannot hide the fact that all pensions are contracts for one generation to look after the preceding one out of its current capacity to create income
Open your eyes to economic reality: putting some cash in the stock market does not change the reality of the pension deal
The pay as you go pension is an honest form of pension
So is the people’s pension I propose
The private pension is always a con-trick, as many are finding
Richard
Richard,
Your criticism of Peter contradicts the quote that you used as the body of you original post. You say:
“Open your eyes to economic reality: putting some cash in the stock market does not change the reality of the pension deal”
In contrast, the first paragraph of the TUC quote includes the statement:
“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.”
That highlights very clearly the way in which it changes the pension deal. By moving to defined contributions, the tax payer has to fund the pensions of current public sector employees, rather than passing on the obligation to the next generation of tax payers. The TUC are correct to say this would be expensive for decades, but unfortunately, operating the public sector in a socially responsible fashion will generally be more expensive in the short term than a “consume now, make someone else pay later” approach.
Peter
I cannot see the contradiction: as far as I can see the TUC make the same point as me
What can you see that I cannot?
Richard
Richard,
Is that question directed at me? You’ve addressed it to Peter, but it seems to be a response to my comment.
Assuming it is, the answer is quite simple – the TUC acknowledge that a defined contribution pension scheme changes the mechanics of the pension deal and where the obligation to pay falls, whereas as you insist that it does not.
I disagree with the TUC’s suggested approach because I believe that forcing future generations to pay a set amount to cover the cost of services we are consuming today is both socially irresponsible and undemocratic, but the TUC at least seems to understand the underlying economics.