An IEA study reveals the true magnitude of public sector pension debt.
Each year, the government makes new pension commitments to public sector workers worth over £40billion.
The recent very high level of public sector pay increases has led to a significant rise in the pension debt burden. Neil Record comments, “When the government increases nurses’ pay by, say, 10%, that increases the whole of the value of the past pension liabilities the government has accumulated in respect of current workers by 10%.”
The pension liabilities that the government has accumulated are just like other forms of national debt, argues Neil Record. The government must honour those commitments and they will represent a huge burden on future generations of taxpayers. The cost of meeting the public sector pension commitments already made will peak at £90billion per annum in 2045. Commenting on the study, Philip Booth, Editorial Director at the IEA, said, “People who are currently too young to vote will bear the greatest costs. This is not a legacy one generation of politicians should leave their children. It is a scandal that the government has only made minor proposals regarding public sector schemes. At the same time, increased regulations and the imposition of accounting standards on the private sector are driving out private sector final salary pensions.”
When calculated correctly, the cost of providing pensions for public sector workers varies from 35% of salary for male teachers to 72% of salary for policewomen. Public sector employers such as local education authorities, police authorities and so on are charged much less than this.
Governance in public sector schemes is also very weak. For example, 39% of local government employees and 68% of fire service employees retire early through ill health.
Neil Record, together with Philip Booth and Nick Silver who provide commentaries on Neil Record’s research, suggest a number of ways to deal with the growing public sector pensions deficit:
- Whilst recognising that little can be done to reduce liabilities accumulated so far, It is important that public sector employers pay the full costs of pensions promises made to their employees in the future.
- The government could fund future public sector pension commitments by issuing government bonds and investing the bonds in the pension schemes.
- Government employers should have the option of giving their workers significant pay increases and allow them to make alternative pension arrangements.
Read the full study here.