Fixing public sector pensions requires cooler heads to prevail
The publication last week of the National Audit Office’s report on the cost of public sector pensions produced an inevitable media outcry[1]. In the current fiscal climate, it may be more forgivable this time, but nevertheless a more adult approach to the debate would benefit everyone.
There is no denying that the numbers are quite scary. Unfunded pay-as-you-go public service pension schemes are expected to cost nearly £80bn in 2059/60 (in real terms) compared to around £25bn today (notwithstanding employee contributions). However, assuming economic growth proceeds along its long-run average of 2% per annum, this equates to 1.7% of GDP – the same proportion that we spend today. Furthermore, the reaction is premature. The NAO have made clear that a second report later in the year will consider the ‘value for money’ of public sector pensions, and that they have not yet taken account of recently introduced cost-saving measures.
On the other hand, the NAO have also rightly questioned the Treasury’s assumption of zero growth in the public sector workforce. The reason for the cost increases is precisely that public sector employment has increased significantly in the past decade: it is wrong to suggest that public servants are getting more in terms of pensions – there are just more of them. And we will probably need more again in the near future as society deals with the implications of increasing longevity. If the assumption is wrong, the pensions cost could be much higher than reported.
Clearly, there are issues that need to be addressed. But a mature debate is required. It must be acknowledged, in the first instance, that the beneficiaries of public sector pensions are not a monolithic band of mandarins. They are soldiers, doctors, nurses, teachers – delivering vital universal services that the private sector cannot provide. Opposition politicians talk of a ‘pensions apartheid’ and say the public sector should suffer the recession like everyone else – yet the public consistently agrees that these groups of workers should be paid more. They deserve it, and decent pensions are part of a fair system of incentives and rewards which helps to attract the most talented employees.
This does not mean that public sector pensions should be prioritised over other spending pressures. But it does mean that a war on public servants would be both unjust and destructive. We can only start to address the rising cost of public sector pensions once cooler heads prevail.
Craig Berry
References
1. NAO (2010) The cost of public service pensions, available at www.nao.org.uk. See also M. Butterworth and J. Kirkup (2010) ‘Public sector pensions will cost every household £1000’, the Telegraph, 12 March, available at http://www.telegraph.co.uk/news/newstopics/politics/7423240/Public-sector-pensions-will-cost-every-household-1000.html and J. Moore (2010) ‘The politicians’ solution: sit back and hope’, The Independent, 12 March, available at http://www.independent.co.uk/opinion/commentators/james-moore-the-politicians-solution-sit-back-and-hope-1920092.html.