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Public Sector Pensions Are Affordable And Set The Standard For Others

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http://www.timesonline.co.uk/tol/comment/c...icle6733949.ece

Public sector pensions are under sustained attack. Hardly a day goes by without a claim from an employer group, opposition politician or right-wing pressure group that they are unaffordable, out of control and unreformed. Worse, they often go on to suggest that quick and easy savings can be made by cutting or changing pensions in the public sector.

It is normally those of us who believe in a more equal society who are accused of the politics of envy. But there is a definite attempt to stir up jealousy among private sector workers of fat-cat pensions in the public sector. But these arguments are at best misleading and at worst scaremongering nonsense.

It is true that public sector workers get better pensions than most in the private sector. But that is no profound insight. Anyone with an employer-backed pension, wherever they work, gets a better deal than the average private sector employee, as nowadays most are not building up an employer pension.

But the solution to our looming pensions crisis is hardly to cut the pensions of those who can look forward to a modest post-retirement income.

So why don’t the opponents’ arguments stack up? First is what I call the “final reminder fallacyâ€. The game here is simple. Calculate some estimate of future public sector pension liabilities and then express it as if it were a final reminder bill that will have calamitous consequences if it is not paid with 28 days.

But pensions are not paid in advance. The figures used by the critics include pensions being built up by public sector employees now in their twenties. Any attempt to work out continuing public expenditure under any budget heading for more than three decades into the future, and express it as a sum that has to be paid today, will produce a big scary number.

The second fallacy is the out-of-control charge. Normally, the critics glibly ignore the contributions made by public sector employees and employers — even though they cover most of the cost of the pensions in payment each year. But the difference between any two relatively equal big numbers can jump around sharply from year to year. The cost of pensions is linked to increases in price inflation while contributions are linked to the public sector wage bill. Over time these both move in the same direction. But from year to year they are often out of sync.

Perversely a government that holds down public sector pay one year may save a substantial amount, but it makes the cost of pensions bigger that year as a pay freeze is also a contributions freeze. The amount that governments have to find to pay public sector pensions, however, does not leap around and is affordable. At present the cost of pensions in payment is about 1.5 per cent of GDP. Not surprisingly in an ageing society this will go up slowly — rising to 2 per cent over the next 20 years but then, according to Treasury forecasts, it holds steady. But this is part of a wider pattern of changing public spending.

Health and long-term care costs will also increase — and are greater than public sector pensions.

Next come the fat-cat claims. Of course a few well-paid public servants with long service records will retire in some comfort, if not to the standard expected by Sir Fred Goodwin. But unlike the special schemes common in top boardrooms, top public servants (other than special cases such as MPs and judges) are in the same scheme as their staff. The chief constable is in the same scheme as the constable. And average pensions are modest. Most public sector pensions in payment are less than £5,000. In the biggest scheme, local government, the average is £4,000 and for women £2,000.

What about the easy savings? Of course, schemes can change. Indeed, almost every public sector scheme has been renegotiated in recent years to reduce costs and take into account longer lives. But pensions in payment cannot be cut without breaking promises made to staff in return for joining their schemes (and breaking the law too). Changes to schemes inevitably take some time to deliver savings.

Particularly strange is the call to replace unfunded pay-as-you-go public sector schemes with defined contribution (DC) 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 taxpayer 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.

Is this the author?

And we can all trust Treasury forecasts.

So there we are just big numbers don't matter as the bill isn't due for 28 days, presumably economic growth will solve all the problems.

We have nothing to worry about the public sector pension liability is affordable and it's critics are scare mongers.

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this is painful:

Perversely a government that holds down public sector pay one year may save a substantial amount, but it makes the cost of pensions bigger that year as a pay freeze is also a contributions freeze.

with people this arrogant and thick at the head of the unions, then it's going to be no problem at all cutting them by 50% using fiddled inflation figures

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Guest absolutezero
http://www.timesonline.co.uk/tol/comment/c...icle6733949.ece

Is this the author?

And we can all trust Treasury forecasts.

So there we are just big numbers don't matter as the bill isn't due for 28 days, presumably economic growth will solve all the problems.

We have nothing to worry about the public sector pension liability is affordable and it's critics are scare mongers.

You've got the gist of it, minus the economic growth bit.

Public sector pensions are affordable. It's as simple as that.

Like all these things, it comes down to envy.

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Public sector pensions are affordable. It's as simple as that.

no they're not. he made it up. he's a massive V.I.

thing is, they sortof ARE affordable if you screw them, as they will be. so not such a big prblem.

I am still amazed at how easy this is going to be.

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Guest absolutezero
no they're not. he made it up. he's a massive V.I.

thing is, they sortof ARE affordable if you screw them, as they will be. so not such a big prblem.

I am still amazed at how easy this is going to be.

You can feel the venom and jealousy oozing out of the screen.

If you think it'll be easy you're a fool.

The fiddled inflation statistics are now the cat out of the bag.

Give it a bit of time and a fuss will be made.

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You can feel the venom and jealousy oozing out of the screen.

If you think it'll be easy you're a fool.

The fiddled inflation statistics are now the cat out of the bag.

Give it a bit of time and a fuss will be made.

yes, but only when it is too late - in the same way that private sector workers have woken up to 10 yrs of sub-par pay rises, me included, same psychology. people just won't notice until they can't do anything.

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So why don’t the opponents’ arguments stack up? First is what I call the “final reminder fallacyâ€. The game here is simple. Calculate some estimate of future public sector pension liabilities and then express it as if it were a final reminder bill that will have calamitous consequences if it is not paid with 28 days.

By all means, fund the scheme properly so that current contributions + investment income match the liability.

Trouble is, a significant proportion of the state pension scheme and public sector pensions are unfunded. Current contributions are paying retirees' pensions (or buying retirees' annuities). That's a Ponzi scheme.

If we are going to continue to have these schemes, we need to draw a line, so that going forward, all final salary schemes must be fully funded. Each year, the present value of benefits accruing must be matched by a contribution (which admittedly may be an actuarial estimate). Public schemes must not be allowed to fall into deficit. That will ensure that the full cost accruing under such schemes is recognised by employers/employees now rather than leaving a black hole in the future. If they are unaffordable, raise taxes or (better), modify the schemes e.g. by increasing the employee's contribution.

But don't carry on pretending that things are ok as they are, and that it's ok to build up a massive deficit to be paid for by future contributions.

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Guest absolutezero
By all means, fund the scheme properly so that current contributions + investment income match the liability.

Trouble is, a significant proportion of the state pension scheme and public sector pensions are unfunded. Current contributions are paying retirees' pensions (or buying retirees' annuities). That's a Ponzi scheme.

If we are going to continue to have these schemes, we need to draw a line, so that going forward, all final salary schemes must be fully funded. Each year, the present value of benefits accruing must be matched by a contribution (which admittedly may be an actuarial estimate). Public schemes must not be allowed to fall into deficit. That will ensure that the full cost accruing under such schemes is recognised by employers/employees now rather than leaving a black hole in the future. If they are unaffordable, raise taxes or (better), modify the schemes e.g. by increasing the employee's contribution.

But don't carry on pretending that things are ok as they are, and that it's ok to build up a massive deficit to be paid for by future contributions.

You misunderstand what public sector pensions are.

They're not some kind of benefit. They're deferred salary.

Scrap the public sector scheme. Fine. I'll take the money as salary, now, instead. It's six or two threes to me.

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You can feel the venom and jealousy oozing out of the screen.

If you think it'll be easy you're a fool.

The fiddled inflation statistics are now the cat out of the bag.

Give it a bit of time and a fuss will be made.

I'm in favour of gold standard pensions and have no objection to public sector workers receiving them.

Private sector pensions should be of the same standard. This would be much easier were there to be fewer public sector workers.

My conclusion, keep the public sector pensions as they are but cap the public sector to no more than 10% of the available work force.

Where should such drastic cuts come from. I neither know nor care. We will have to get used to the services that we receive being those that the country can afford, which is not much at the moment.

p-o-p

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Guest absolutezero
yes, but only when it is too late - in the same way that private sector workers have woken up to 10 yrs of sub-par pay rises, me included, same psychology. people just won't notice until they can't do anything.

Except public sector pensions work on a fraction of your final salary.

Provided people are happy with the salary the pension is fine as well.

Yes, granted the false inflation figures are used to work out next year's salary, but the Government have shot themselves in the foot with multi-year pay deals.

Next years teachers' pay settlement is 2.3%. "Inflation" is negative yet they can't (or have decided not to) go back on the multi year settlement. Genius!

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You've got the gist of it, minus the economic growth bit.

Public sector pensions are affordable. It's as simple as that.

Like all these things, it comes down to envy.

So where in the public sector do you work?

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Except public sector pensions work on a fraction of your final salary.

Provided people are happy with the salary the pension is fine as well.

Yes, granted the false inflation figures are used to work out next year's salary, but the Government have shot themselves in the foot with multi-year pay deals.

Next years teachers' pay settlement is 2.3%. "Inflation" is negative yet they can't (or have decided not to) go back on the multi year settlement. Genius!

I'm talking about decades not years, tbh

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Guest absolutezero
I'm in favour of gold standard pensions and have no objection to public sector workers receiving them.

Private sector pensions should be of the same standard. This would be much easier were there to be fewer public sector workers.

My conclusion, keep the public sector pensions as they are but cap the public sector to no more than 10% of the available work force.

Where should such drastic cuts come from. I neither know nor care. We will have to get used to the services that we receive being those that the country can afford, which is not much at the moment.

p-o-p

I really couldn't agree more. We need fewer backroom staff shuffling paper and generating statistics.

However, since Labour came to power there are only 600,000 more public sector staff than when the Tories were. Nowhere near what most people imagine.

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You misunderstand what public sector pensions are.

They're not some kind of benefit. They're deferred salary.

Scrap the public sector scheme. Fine. I'll take the money as salary, now, instead. It's six or two threes to me.

You misundertstand what deferred salary is.

It's a promise that's not going to be fulfilled.

The fact that public sector workers have low self esteem and have been suckered isn't anyone elses fault. They made a bad bet against demographics, tough buns.

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Guest absolutezero
So where in the public sector do you work?

Science teacher.

Yes, I am a VI - mentioned elsewhere.

But I work on the principle, don't water other people's conditions down, try to improve your own.

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You've got the gist of it, minus the economic growth bit.

Public sector pensions are affordable. It's as simple as that.

Like all these things, it comes down to envy.

How so?

Take a nurse. Nurses can purchase 1/80th of their final salary for the length of their retirement by paying 6% of their current salary, and can retire at 60. I beleive that's common for other public sector professions. If the nurse spends 20 years retired (that's about right, life expectancy is close to 80 these days and still going up), then the 1/80th of their final salary is actually every year is 25% of their last year's pay packet in total over the retirement. So by paying 6% of their current salary a nurse can purchase 25 % of their final salary. Assuming their pay goes up over their carrer, then for every pound they put in they get more than 4 pounds back.

Ok, you might be right in that it's "affordable", but only because the government will have the power to levy taxes on the whole working population to pay for the short fall. It's certainly not self funding as the times article suggests. Nowhere near.

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I really couldn't agree more. We need fewer backroom staff shuffling paper and generating statistics.

However, since Labour came to power there are only 600,000 more public sector staff than when the Tories were. Nowhere near what most people imagine.

surely you have to ad the QUANGOS, state-fed-charities, and dedicated private consultancies of one form or another

of course, they don't get the pensions, but they do suck the money

Edited by Si1

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Guest absolutezero
You misundertstand what deferred salary is.

It's a promise that's not going to be fulfilled.

The fact that public sector workers have low self esteem and have been suckered isn't anyone elses fault. They made a bad bet against demographics, tough buns.

Except the state will look after its employees.

Oh I forgot. The state is going to collapse and it's going to be like Somalia... :rolleyes:

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You misunderstand what public sector pensions are.

They're not some kind of benefit. They're deferred salary.

Scrap the public sector scheme. Fine. I'll take the money as salary, now, instead. It's six or two threes to me.

Except public sector salaries are already above private sector salaries so another 20%+ increase would be totally unacceptable.

They're a way of hiding the true rate of public sector pay from the taxpayers.

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Guest absolutezero
How so?

Take a nurse. Nurses can purchase 1/80th of their final salary for the length of their retirement by paying 6% of their current salary, and can retire at 60. I beleive that's common for other public sector professions. If the nurse spends 20 years retired (that's about right, life expectancy is close to 80 these days and still going up), then the 1/80th of their final salary is actually every year is 25% of their last year's pay packet in total over the retirement. So by paying 6% of their current salary a nurse can purchase 25 % of their final salary. Assuming their pay goes up over their carrer, then for every pound they put in they get more than 4 pounds back.

Ok, you might be right in that it's "affordable", but only because the government will have the power to levy taxes on the whole working population to pay for the short fall. It's certainly not self funding as the times article suggests. Nowhere near.

Deferred salary. Not a benefit.

Pay the nurse 25% more. Same answer.

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Guest absolutezero
Except public sector salaries are already above private sector salaries so another 20%+ increase would be totally unacceptable.

They're a way of hiding the true rate of public sector pay from the taxpayers.

Conspiracy!

Where is Bear-Lite?

Besides it's a statistical anomaly.

The private sector includes lots of unskilled workers like burger flippers and cleaners.

The public sector has a higher proportion of highly qualified and skilled staff like doctors, teachers, nurses etc.

So I would expect public sector wages to be, on average, higher than the private.

Edited by absolutezero

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I really couldn't agree more. We need fewer backroom staff shuffling paper and generating statistics.

However, since Labour came to power there are only 600,000 more public sector staff than when the Tories were. Nowhere near what most people imagine.

Labour or Tories record is irrelevant. The starting point should be that public spending accounts for a small percentage (say 12.5%) of GDP and the administration should make the best of it - not passing laws, staffing up to accommodate them and dumping the bill on the taxpayer.

p-o-p

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Except the state will look after its employees.

Oh I forgot. The state is going to collapse and it's going to be like Somalia... :rolleyes:

Oh no mate.

You;ll get your pension.

It just won't buy you anything.

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Deferred salary. Not a benefit.

Pay the nurse 25% more. Same answer.

Ok. I see what you mean. But we can't afford to pay all public sector staff 25% more (the effective value of their pensions benefits), therefore their pensions are not affordable.

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The fact that public sector workers have low self esteem and have been suckered isn't anyone elses fault. They made a bad bet against demographics, tough buns.

yep - I used to think they'd put up a fight. now I doubt it after giving it some more thought.

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