Alan Johnson defends the retention of the age 60 retirement date for public sector workers by stating that not many of them actually do in fact take retirement then.
The cost of retaining the current pension age for current staff is modest because many already work beyond it.
So, if it affects so few people why not go ahead and make the change to 65?
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Is it that easy to change public sector worker’s retirement age? you can through turnover or by negotiating contractual changes.
There’s lots of myths about public sector worker’s pensions:
Number One in my eyes is the myth that payments to retired government workers are made from tax revenues. This is wrong. Most public sector pension schemes are ones where the employee and employer contribute to an independent pension fund as part of the normal renumeration process. In my case this is a local government pension fund. And within this fund we do have som e guaranteed rights. The reason why they pay out quite generously is that a large proportion of earnings are put into them. And the employer (the government) puts in a large proportion – but this is part of the renumeration deal.
In my experience, the folks getting the best deals are the most senior people. Who have such favourable pension and contract terms that if they are useless, it costs too much to sack them, they are left in posts to collect their big salaries or are allowed early retirement on almost a full pension (i.e. govt coughs up full pension contribution) to get them out of the way.
Myth #2 has to be that all public sector workers are capable of working to 65 or beyond. I can’t imagine nurses on an orthopeadic ward working to a ripe old age – its a physically demanding job. However, if the flexibility is there in the public sector older people could be reallocated to jobs requiring skills and experience but not so much physical ability.
My solution would be to have a more flexible system of choice with no imposed retirement age at all. This would also be less discriminatory. The current public sector system is very rigid. to counter the myopic judgement that most humans are prone to, I would promote heavy loading of public sector pension payments early on so that in our youths we don’t fritter all our money away on beer and regret it later.
Your comment about senior people is accurate. But it is true about junior people as well.
The public sector pension is a giant handout paid from taxation, local or national. Playing jiggery pokery word games with “fund” doesn’t hide that.
The “normal renumeration process” is simply the process by which retired public sector workers get a handout from the taxpayer.
If you think that it is paid for somehow go ask an actuary how much an equivalent private pension would cost. I worked it out once for a Police Seargant who was pushing the “we do pay for it” line. Not even close. He was paying 11% of his salary which sounds a lot except to get his pension privately it would be more like half his salary. Assuming you could find someone to underwrite it.
Calling it “normal renumeration” is just hiding it. It’s normal for the public sector, largely because the public sector has a bottomless pit of money it can leech. Why do you think Council Tax and the Police Precept keeps skyrocketing.
Yes, sure, not all Public Sector workers are capable of working to 65. So what ? You think Private Sector workers are ? This is comical. Public Sector workers go on about how hard they work, and how badly they are paid relative to the Private sector…. this is invariably very carefully selecting Private sector jobs.
I think you are technically wrong Paul. Pension funds are part of the normal renumeration process in most public sector jobs. Fact. Once its gone into the pension fund, you can’t ask for the money back as a taxpayer. That is because the fund is controlled by a trust which is voted and approved by pensionholders (not the government or the voters). Once a pension payment is made, it has already been sunk into the pension funds. Its not hidden. All pension schemes are transparent and visible to the public. All pension funds abide by strict fund management and governance rules.
Your argument centres around whether you think public sector workers are worth your tax money – i.e. whether you think that the overall level of renumeration is too high. Best sticking to that argument. Its a fair question. If you are a tax payer, you are the public sector funder (that may or may not be being leeched) and you are right to ask these questions and vote as you see fit.
But please be clear about public sector worker’s pension funds. You can change the contributions and contracts of the workers now, but you can’t change what people have already put in. You can’t take away contributions or change the conditions to which they signed up to the pension funds. The Pension Funds are independent. Only the fund managers initiate changes, subject to voted approval of pension members and their elected representatives on the board of trustees.
Tim adds: All of this is a little misleading. If public sector pensions were defined contribution then I wouldn’t give a damn. They would indeed just be delayed compensation. But they’re not. They’re defined benefit. It is the disparity between what is in the pension funds and the likely future payout, something which is both huge and something the taxpayers are on the hook for, that is scary.
Well Tim it depends on the pension fund.
My Local Government pension fund is a chunk of money invested in the stock market, assets, etc just like a private sector pension fund. The reason that final salary schemes can be afforded is because of the high level of contributions per worker. On average equivalent to 18% of salary in my case. Not a bad contribution, eh?
Some pension funds are running low, such as the Royal Mail, because the company itself controls it and it is not put out to an independent fund manager that is voted in by pension rights holders. And is so not managed on a sustainable basis. So the Royal Mail dips into the pension fund, or doesn’t contribute enough in, or doesn’t make its workers contribute enough of their salary so there’s a shortfall. Expectations that the Govt will bail it out.
This is part of the problem when talking about public sector workers pensions – much of public sector pensions are in fact independent funds that are investing in assets and financial instruments etc. The government or voters in fact cannot dip into these funds. There may be controversy if there is mismanagement though and they have a shortfall – but many funds are professionally managed as I have tried to say.
So lets be straight about the public sector pension thing – most are independent funds and are not in fact dependent on future tax revenues to pay out the pensions.
That seems a very fair comment. A potential mismatch between defined benefits and actual accumulated contributions has to be paid for by somebody, and in the end it’s either the taxpayer or the scheme recipients. That’s a key point in understanding what’s going on. But let me play devil’s advocate on one point (as it’s more fun than agreeing). If one believes that labour markets work like other markets then the fact that public sector pensions are more generous should be reflected in labour supply decisions. In other words, this generous pension provision should allow the public sector to recruit and retain people at lower wages than otherwise.
If that is not true, then it means that either the market is not working terribly well or people are not very rational in weighing up the deals they are getting. To put it another way, surely a stirling advocate of free markets would think that this all comes out in the wash, and that cutting pension provisions would just mean having to pay higher wages to attract labour of a given quality? None of which is an argument against switching to defined contribution of course. It just raises a question about whether doing so saves the taxpayer any money in the end.
Tim adds: If I thought that the labour market worked efficiently for public sector employees of course I would agree with you here. I don’t think it does, being way too tied in with politics to actually work properly. For example, national wage bargaining is ludicrous but it still happens.
Yes I agree. An appropriate analysis would compare public sector salaries of jobs of similar levels of skill and occupation.
We are often given average salary public vs. private but its never disaggregated by the type and level or work people are doing. That would be more telling.
You could go further and suggest offshoring/ contracting out public sector work to India etc. Maybe they would do a better job of administering tax credits etc!
In terms of analysing renumeration – I would count the employer pension contribution in with total renumeration. I do this anyway on a personal basis.
Personally I am not averse to working in the private sector and have done so in the past. My public sector job certainly does not pay as much as a private sector post as an economist, including pension considerations. I do it because I choose to mostly due to job satisfaction. Certainly job security and having a govt pension de facto do not matter.
It would also be interesting to compare tax payers money spent on bailing out private sector pensions vs bailing out public sector pensions.
Is it possible to compare workers who’s pension funds are collected of extorted money with those who have to serve and persuade fickle customers?
A final salary scheme fund is a current asset but a future liability. We should convert them all into current assets for staff and change the system.
The pensions should also be worked out by looking at the equivalent cost of buying an annuity for the income, and the contributions needed to fund the annuity purchase. Most extortion sector workers are on 50% more pay under this analysis. This would of course be an illegal level of contributions.
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