Sunday, June 20, 2010

Another article on the subject of morally indefensible social injustice.

The public-sector pensions crisis facing the coalition

No connection to HPC at first glance but this Ponzi scheme impacts heavily on the economy and therefore by implication on the housing market. And yes, it's another right wing paper and no doubt there will be the usual hate posts from certain contributors, against the Telegraph, Gilligan and myself but I thought HPC'ers disliked Ponzi schemes?

Posted by mr g @ 10:47 AM (2629 views)
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39 thoughts on “Another article on the subject of morally indefensible social injustice.

  • “and no doubt there will be the usual hate posts from certain contributors”,

    The only hate I’ve seen so far is from you.

    “against the Telegraph, Gilligan and myself”

    1. Vain
    2. Paranoia
    3. Who is it that’s starting the argument here?

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  • I would have thought the hate emanates mostly from you mr g, considering your antipathy towards the public sector, which of course the wealthier section of the population tend to dislike because they can afford to pay for what the public sector gives to those who can’t. Still, I don’t really believe you wish to argue about this, not least because you make nonsensical references to Ponzi schemes.

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  • The deal is (there’s only one deal around): you get tax free capital gains in your house price; you don’t get good pay ,wage rises and pensions .If you don’t like it ,you should n’t have bought into it.Not I agree that there was much choice.But some people accepted it a lot less relunctantly than others.

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  • The public sector in general and public sector pensions in particular have become the new scapegoats. Conveniently they deflect attention away from the negligence of politicians and out of control banks.

    To compare public sector pensions with a ponzi sceme is a hideous distortion of the truth.

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  • Since 1997 we have had 13 different Pensions Ministers – lets see what Ian Duncan Smith and Steve Webb as a combination now come up with.

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  • @LTF

    My family background is working class and whilst I may have had the good fortune to pass the 11 plus and go to grammar school, I still left school before my 16th birthday, went straight into work on the shop floor in manufacturing and improved myself through hard work and “the university of life”.

    The point of this autobiography is to emphasise that I believe in fairness and equality of opportunity for all and not just the privileged and those born with a “silver spoon” in their mouth.

    I can honestly say that I bear no malice whatsoever towards the public sector. I agree 100% with the principle of the NHS, a free, high standard education system, the services provided by local authorities etc.

    Obviously we have to pay for these services, however, what I do have a problem with and I assure you this is not envy, as I was fortunate enough to retire at 60, is that a majority of private sector employees are effectively paying into their own pension (if at all) and topping up the public sector through, for example, a portion of council tax.

    In effect, we now have a nomenklatura, an elite subset of the general population as in the Soviet Union and other Eastern Bloc countries who held various administrative positions in all spheres of those countries’ activity.

    This is supported by the use of the appalling expression “key workers” that has grown in the last 10 to 15 years to describe NHS employees, teachers police etc. Yes, all those people do necessary jobs but so do the millions of private sector workers who actually help to create the money to pay for these services.

    You’ll notice I emphasise it’s the workers, not the fat cats, who create the money and these are the people who possibly don’t have pension plans of their own yet contribute to the public sector pension pot.

    I fail to see this as an equitable situation where the public sector is perceived as being key to the functioning of a civilized society. It’s simply part of it and therefore it’s employees should be no more privileged than those in the private sector.

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  • paranoia blue says:

    The bottom line is: who makes the money, for those who spend it!?

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  • The recent(in my opinion biased) blog by Stephanie Flanders on this subject certainly proved the point judging by the comments that our public servants are alert and well organised-I wonder if they could organise perpetual motion or the defiance of gravity.

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  • mr g
    Well I’m happy to accept most that you say. I also think public and private sectors are important components of a working society.
    However, I think you are looking at public sector pensions in the wrong way. Bear in mind that a pension is a deferred salary. We all pay something into our pension (don’t think there are any non-contribs anymore) and (with luck) employers put in something too. When we pay for a service/good, part of the cost goes towards staff, part of which is deferred income (pension). Council tax is all part and parcel of this; it is not a subsidy.

    The big problem with pensions now is the rise in longevity. So pensions have to change. Private sector – in some cases – change by shafting the employees. Public sector, to its credit, will not do this. Instead retirement ages are being raised and contributions increased. This is all too dull to make the news, yet it is happening.

    None of this has anything to do with Ponzi schemes though. It has a great deal to do with equality and fair distribution of wealth. Few public sector workers are very wealthy, bar a few judges/ permanent secs. perhaps. I don’t need to rehearse the arguments over banks and their misappropriation of wealth. Frankly I can tolerate far more easily the creakiness of some small areas of the public sector than the behemoth of the rich and powerful who are the real enemies of society. Besides, as I’ve said before, my dealings with the public sector (tax offices, etc) tend to go far more smoothly than those with the private (credit card companies, etc – spit of floor).

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  • mark wadsworth says:

    Mr G, the land market and the public sector are sort of Ponzi schemes, but IMHO they have other things in common:
    1. They both rely completely on government intervention, restriction and protection.
    2. They both push ever larger debts onto future generations to the benefit of, frankly, ‘Baby Boomers’ (and I guess that I am a Baby Boomer for these purposes).
    3. They are both pure and utter rent seeking and live off transfers from the productive private sector.

    I fail to see any real difference between Home-Owner-Ism and a bloated public sector (they are both types of socialism).

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  • @7 mark wadsworth,
    I fail to see any real difference between Home-Owner-Ism and a bloated public sector (they are both types of socialism).

    I fail to see any real difference between Home-Owner-Ism and the bloated banking sector (they are both types of closed door capitalism).

    How much did Sir Fred get paid off with? I believe it was somewhere in the region of £30 million.
    How about our Mr. Apllegarth. Severance package of £760,000. His pension fund was also increased, taking its total value to £2.62 million.

    All for nearly destroying our beloved capitalist free market economy. Nice!

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  • Btw, I am not denying that there is room for trimmng back the public sector, as long as the people made redundant have jobs to go to, and are retrained as necessary (more expense to the taxpayer?)

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  • Pete, somehow fred was excused any responsibility for his job. Moral hazard. Personal accountability?

    “juvenile job”

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  • Britain’s Debt Problem Explained

    Unfunded Pension Liabilities

    Whilst private sectors pensions are determined by what the market will pay at retirement on the basis of the pension fund values and annuity rates, the tax payer picks up the tab for public sector worker pensions that receive up to 2/3rds of final salaries. The public sector has no growing pension fund, which means public sector pensions are paid out of the current contributions, with the shortfall made up by the tax payer, which has resulted in a huge pension time bomb that is estimated at a liability of £996 billion and growing, as more public sector workers retire into longer retirements, so will the gap between contributions and pension payments widen which will result in a pensions time bomb exploding that will hit tax payers hard and act as an annual public sector pensions tax on tax payers.

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  • If the UK Government doesn’t rein in expenditure and let the budget hole grows then hyper-inflation is unavoidable and economy will collapse.

    If the UK Government reins in then unemployment may rise and house price will collapse.

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  • @13, it’s hard to believe the government will make cut backs anywhere like what is required. They must realise the civil unrest it will cause. We might as well all spend any saved money before it gets inflated away. This is one thing I am seriously considering. I have saved for 12 years for a house and now out of work. It’s tempting to go and spend it on one or two round the world cruises before the the money becomes worthless.

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  • “I fail to see this as an equitable situation where the public sector is perceived as being key to the functioning of a civilized society. It’s simply part of it and therefore it’s employees should be no more privileged than those in the private sector.”

    Men in society on average earn more than women. Would you propose we drop mens wages down to match womens as a way of eradicating this inequality so that they “should be no more privileged”?

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  • @mr g, you said that the private sectors helps to create the money, but really it doesn’t, the bank of england pretty much makes all of the money. Hardly anybody seems to understand how trade works thinking that providing goods and services causes some money to spring into existence and that consuming a service or buying goods causes it to disappear – the former being the mistake you’ve made.

    For example people often complain that it’s wrong for rubbish modern artwork to sell for hundreds of thousands of pounds or for footballers to be paid millions when the money could feed thousands in the third world instead. But, of course, the money still exists so if the money could ever have fed so many people it can still do so.

    What is really happening is that the private sector is providing the goods and services that the public sector employees need done for them to be able to spend their time doing what the government tells them to do. Taxation is just how the government tells the private sector how much of its resources is to be provided to the public sector employees and government spending is how the government redeems said resources.

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  • The private sector does n’t make money: money is created by the private sector banks and private sector firms just circulate it in a way that advantages them,(private sector prices being all regressive as the rich guy pays the same for a loaf of bread as the poor family who desperately need it.) There is some public money creation now by the government’s quantitative easing programme.
    If the government were to take over the money creation process and for instance give the QE money to the public services,the way Lincoln paid for the Union army with government Greenbacks rather than take on exorbitant loans,there would be no need to pay public servants with money from taxation. The usual stage army of hysterics would start bellowing Inflation! Zimbabwe! Greece ! and the more educated Weimar! but this is not necessarily inflationary: the bwankers instead of being locked up as they should be for
    incomptence in not being able to make a profit from what really is a licence to print money,are creating credit every day.The government could easily cut them out of the loop.If an inflationary surplus does appear,it will show up clearly in inflated house prices which can be scalped by a Land Value Tax.

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  • LTF – its always all about screwing the workers. That just seems odd to me. As you say pensions are part of a package but how EXACTLY are they funded? Final salary schemes are simply (except for the most profitable employers) just too expensive (whether because of Longevity or IRs or combination).

    When there is a contraction, i agree the workers get hit first. Also true that they probably dont get enough of the spoils when things are going well. However if there is a vote on stealth income reduction (through reducing pension benefits) then is that better for the average employee than putting them on short time working / making them unemployed or even making the company go into liquidation?

    I think you have this view that all employees are out to screw their workforce. While i would agree that management are the last ones to be affected by a downturn (and i dont agree with that either), i cant see what else they can do to reign in expenditure, and keep solvent. Surely the pension pot must be (sadly) the front line.

    Now as for the public sector – have i missed something? Doesnt the superannuation funds get supplemented by taxes?

    Yes the money used to bail out the banks (rightly or wrongly) perhaps could have been better used to support pensions, but really would it?If so why should THAT benefit just those in the public sector?

    Are you can arguing that public sector workers are low paid and the quid pro quo for that is their pensions should be ring fenced? I am sure that there are as many poorly paid people in the private sector too… but maybe you will prove me wrong there!

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  • mg G and mark @7
    Are you seriously advocating an economy with no public sector? What would be your model of a pure free market economy where it is not the case that large swathes of the population live below the poverty line. I can’t personally think of any single example.
    A Ponzi scheme as I understand it is one in which the income stream is dependent on recruiting new members; if the membership stops growing it collapses. Where on earth is the analogy with a public sector pension?!? It could be financed entirely out of taxation if there were political will. And before you say “ageing population,” if the birth rate is falling there are less children (dependents) to look after.
    “In essence, the Treasury has been using contributions received for the next generation’s pensions to pay the current generation of pensioners,” says Mr Record. “That is exactly how a Ponzi scheme works.”
    Er, no, it is not! This could be stable under a wide range of scenarios, including stable population but also including changes in the proportions of elderly and young dependents cancelling out in the event that population size is changing.

    I couldn’t agree more with Nigel Stanley:
    a lot of the talk about public-sector pensions is “politically-motivated scaremongering” by people whose true motive is a “Thatcherite agenda for shrinking the state.” He says the system is “broadly sustainable,” pointing out that public sector workers have already agreed “cap and share” arrangements to shoulder more of the burden of paying for their pensions.”

    Exactly. In response to this the article just says that pensions depend on a huge set of variables. Well, doesn’t everything? Surely they can offer a little more analysis than that before we kiss public pensions goodbye and rely entirely on the market.

    cuts in public spending have been announced of £6bn. Last year bankers bonuses were… £6bn. Why can’t they comment on that?

    Nick

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  • TO: nickb

    Have you seen the New Star Trek movie?

    The Romulan threw a red ball (which created a black hole) to Vulcan planet and consume everything on the planet until it ultimately disappeared.

    The red ball in this case is the unfunded liabilities on public sector pensions and the planet is UK economy. The UK’s GDP is about 1.5 trillion pounds and the public sector pensions is £996 billions (almost 1 trillion), thus there is no way the government can fund this costs out from tax revenue. Even if you raise the tax to 90% on every penny income earned, that could (at best) only enough to meet annual interest obligation.

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  • “In essence, the Treasury has been using contributions received for the next generation’s pensions to pay the current generation of pensioners,” says Mr Record. “That is exactly how a Ponzi scheme works.”

    In United States the Government Accountability Office (GAO) has promulgation about Interperiod Equity.

    INTERPERIOD EQUITY is a government’s obligation to disclose whether current-year revenues were sufficient to pay for current-year benefits, or did current citizens defer payments to future taxpayers, i.e. it refers to whether current-year revenues are sufficient to pay for the services provided that year and whether future taxpayers will be required to assume burdens for services previously provided.

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  • Simon @18,
    Interesting numbers, where do you get them from?
    GDP is a per annum figure, are you claiming that public sector pensions payments stand to rise to £996bn per annum? I don’t think so! If not, you are comparing a stock to a flow.
    I seem to recall that you were claiming in another post that the public sector debt was about this level. Are you conflating teh two? Apologies if this was not in fact you.
    Nick

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  • Simon
    The TUC guy, Nigel Stanley, asserts that “Even the Government projects that pension costs will only rise to a relatively modest 2% of GDP”
    That is about £20bn per annum.
    How do you account for the difference between his £20bn estimate, which he says is the government’s figure, and your figure of £996bn please? (hint, see my last post).
    Nick

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  • To: nickb

    Please type in “Unfunded Public Sectors Pensions Liabilities” and google on the web. I am sure you can find loads of information about the extent of this black hole.

    http://www.thisismoney.co.uk/pensions/article.html?in_article_id=407513&in_page_id=6

    http://www.iea.org.uk/record.jsp?type=book&ID=390

    http://www.economicpolicycentre.com/2010/04/19/government-pension-liabilities-understated-by-1trillion/

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  • @Simon
    Oops – maths error (but not on the same scale as yours)
    Last post should read

    Simon
    The TUC guy, Nigel Stanley, asserts that “Even the Government projects that pension costs will only rise to a relatively modest 2% of GDP”
    That is about £30bn per annum.
    How do you account for the difference between his £30bn estimate, which he says is the government’s figure, and your figure of £996bn please? (hint, see my last post).
    Nick

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  • @Simon
    Yes, I just read one of these (the last one). It is talking about the stock of pensions liabilities, not liabilities per annum, so it actually just confirms that your comparison of this to GDP is complete nonsense!
    If you think these articles justify your comparison, please say why you think so.
    Nick

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  • nickb – the annual interest on current on-balance sheet debt is about £50bn a year (not including unfunded pensions). we haven’t had a surplus in living memory. we have no choice but to cut govt spending, including the massive pensions bill.

    as a point of principle, why should workers in the private sector pay for public sector workers pensions when most of the former now don’t even have one? public sector workers now on average get pad more than private sector workers. it is a grossly unfair set up and totally unsustainable..

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  • nickb – the annual interest on current on-balance sheet debt is about £50bn a year (not including unfunded pensions). we haven’t had a surplus in living memory. we have no choice but to cut govt spending, including the massive pensions bill.

    as a point of principle, why should workers in the private sector pay for public sector workers pensions when most of the former now don’t even have one? public sector workers now on average get pad more than private sector workers. it is a grossly unfair set up and totally unsustainable..

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  • The basic premise should be that each generation should pay for it’s own pensions ie they should be funded , not pay as you go .

    The eventual recipients should bear the risks associated with underperformance of the underlying investments . Ie it should be defined contribution not defined benefits .

    It is morally unnacceptable to burden the children of the next generation with our generations pensions and expect them to top them up if the investments perform poorly .

    The existing public sector pensions scheme should be replaced with a scheme which is available to everyone and designed to benefit society , not the financial services industry .

    Obviously it has to be completely out of bounds so spendthrifts like Gordon Brown can’t dip into it .

    A degree of compulsion and redistribution in pension provision is neccessary to cater for those who cannot earn enough to provide for their old age .

    Pensions and saving for old age are not quite the same thing , a pension is an insurance policy against living longer than your savings will last .

    If it was run by actuaries it should work .

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  • Spencer
    The question is how big are unfunded liabilities as % of GDP, and whether we can meet that.
    I don’t buy the no choice argument – the stock of national debt is not high by historical standards (I’m getting bored of repeating this… post WW2 it was something like 250% of GDP in common with many other countries… japans debt stock is currently around 200% of GDP). The only thing that matters is whether we can service it. No sovereign, monopoly issuer of its own currency has ever defaulted on debt denominated in that currency, so far as I am aware.
    I agree that it’s grossly unfair that so many private sector workers don’t have pensions. I used to be one of them many moons ago. But the solution is to provide compulsory pensions arrangements for those in the private sector, not to take away pensions from those in the public sector. If a premise of yours is that the public sector doesn’t contribute anything, I think that’s baloney. How far would we get with privatised roads, schools, hospitals, waste collection, police etc? Back to Dickens’ world, isn’t it?
    Nick

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  • To: nickb

    “No sovereign, monopoly issuer of its own currency has ever defaulted on debt denominated in that currency, so far as I am aware.”

    YOU ARE WRONG.

    Here is United States Government history of defaults:-

    http://www.google.co.uk/search?q=US+government+history+of+default&hl=en&sa=G&tbs=tl:1&tbo=u&ei=QnYfTO3rKo_u0wSt7OCdDQ&oi=timeline_result&ct=title&resnum=11&ved=0CD0Q5wIwCg

    As I previously said no one owes Britain a triple A credit rating and the world acceptance of sterling pounds isn’t taken for granted.

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  • nickb – you are wrong about the debt not being particularly high. The Labour govt put much of its debts of the balance sheet – pensions, PFI. If you factor all this in our national debt is actually over £2trn.

    Why should future generations be paying for debts incurred by this one exactly? Why should my children pay for someone else to get benefits when they won’t get half the services that we have because the money has run out.

    You claim that the debt isn’t a big deal. But tell us how the national debt will ever be paid off when we are running such a large deficit, the structural deficit is enormous, the interest payments on debt are more than a couple of govt departments. We have run out of money. Face up to it.

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  • nickb – you are wrong about the debt not being particularly high. The Labour govt put much of its debts of the balance sheet – pensions, PFI. If you factor all this in our national debt is actually over £2trn.

    Why should future generations be paying for debts incurred by this one exactly? Why should my children pay for someone else to get benefits when they won’t get half the services that we have because the money has run out.

    You claim that the debt isn’t a big deal. But tell us how the national debt will ever be paid off when we are running such a large deficit, the structural deficit is enormous, the interest payments on debt are more than a couple of govt departments. We have run out of money. Face up to it.

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  • TOTAL UK Public Debts (not including PFI which is around £5 billion)

    UK National Debts = £922 billion

    UK Unfunded Public Sectors Pension Liability = £800 billion

    UK Unfunded State Pension Liability = £1,400 billion

    UK Bank Bailout = Treasury has only accounted for unrealised loss of £134.5 billion in the national debts liabilities, however total capital injections, liability guarantees and liquidity support to banking system (Northern Rock, Bradford & Bingley and Dunfermline Building Society et) should stand at £781.2 billion. Thus, unrecorded commitments &liabilities is £646.7 billion.

    TOTAL = £3,768.7 billion.

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  • [email protected] “Are you seriously advocating an economy with no public sector?”

    Where have I made that suggestion?

    I accept that the public sector provides necessary services but it’s employees do not have a god given right to jobs for life and final salary pensions.

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