Sunday, June 25, 2006

Greedy civil servants - stop robbing the young and work longer or pay more

More self-serving beefing today, as reports suggest that "No 10 orders shock U-turn on pensions". It looks like the government may try to repair the damage done by its craven pensions cave-in to the public sector unions last year. It is reportedly thinking of accepting that if pension age sticks at 60 then civil servants will have to contribute more to their absurdly generous gilt-edged final salary pensions. Unfunded public sector pension liability stands at some £530 billion according to the government or £930 billion according to actuaries Watson Wyatt, that being about £40,000 per UK household (see Lords debate).

As the populations age and dependency ratios worsen, the trend to later retirements and more saving during the working life is inevitable - otherwise its higher future tax or worse living standards. The chart is adapted from the Pensions Commission showing that for ordinary pensions, retirement age will need to increase to almost 70 to keep the share of national income transferred to pensioners at the current level of just under 10%.

The Civil Service appears to assume that it should be exempt from these broad trends.
This unfunded liability will be a transfer from today's young people to the retirees of a profession widely regarded to have failed to modernise and with endlessly falling productivity - and thus little justification for paying itself so comfortably (see, for example, Martin Wolf in the FT "Why Whitehall needs a great leap forward" and Ed Straw "The Dead Generalist" for scathing but fair critiques.)

The best way to deal with occupational pensions (especially the unfunded variety) is not to have them at all - just pay people the employers' contributions as ordinary pay and let them decide how much to save - giving them a basic safety net, secure vehicles for long term saving and tax incentives to put money away for their retirement. That would avoid all kinds of perverse incentives and distortions that arise from incentivising people through pensions, and put a stop to the quiet robbery of the workers of 2030 and beyond.


Anonymous said...

Public sector pensions do of course need reform. The union’s line that reform would break some sort of contractual obligation at first seems to hold some validity, but not after further scrutiny. Who on earth is the ‘contract’ actually between? The ‘Northcote-Trevelyan’ entrants of the 1980s (and prior) and the as yet unborn workforce of the mid-twenty-first century?! How could this largess possibly pass the Treasury’s twin microeconomic pillars of intergenerational fairness and long-term stability of the public finances?! And how could anyone defend a position that would mean employees ex-ante of the reform retiring up to 7 years earlier than their potentially older colleagues who join ex-post of the reform?!

Nonetheless, it’s worth considering a little further the rationale behind public sector occupational pensions. One line of argument (broadly ‘market failure’) goes that people have a tendency to overweight the present at the expense of the future, have close to zero knowledge of financial investments, and are heavily risk-averse so ‘over-value’ stability/security. Hence, the demand-side argument behind occupational pensions. But there’s also a subtler supply-side argument behind public sector pensions: they form part of the implicit contract under which mandarins operate – loyalty to the Government of the day, keeping silent their insiders’ knowledge of Whitehall goings-on, and willingness to sacrifice job mobility to instead remain as siloed policy leads. It’s not clear that Minister’s would prefer to lose all of the hidden leverage that the pensions deal confers.

The right answer therefore would seem to be that occupational pensions in the public sector will always make up a larger proportion of the overall compensation package than in the private sector, but that they clearly need to be put on the table as part of a broader ‘contestability’ shake-up of the civil service. Depressingly however, there’s a clear chasm between the political capital the Government perceive they still retain and that which they actually do: going in the ring with the FDA and PCS right now appears a truly bold act of ‘asymmetric warfare’…

Clive Bates said...

Hello anon... thanks for the meaty posting... I agree with you on the 'contract' argument is especially absurd - as if the first day of work in the civil service imposes a vast liability in the form of a final salary pension. Nowhere does the 'contract' guarantee life-long employment or continuous grwoth in pay, or indeed any particular level of pay at all, beyond the annual settlement.

On the question of pension as a kind of 'bail-bond' guaranteeing compliance in later life, I'm not sure this is a good way to do it. The private sector has similar motives in relation to intellectual property and corporate strategy... I think best dealt with through contracts or law.