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Monday, 20 June 2011

Should public sector workers be going on strike against demographics?

There's going to be some strange scenes over the next few months if the leaders of the public sector unions have their way. You're going to see a lot of people take to the streets to complain about medical advancements and the skills of doctors.

Make no bones about it, the Coalition government want this battle to go ahead. Should there be a strike, David Cameron will get a different human shield than Nick Clegg - the unions. Because whilst there are plenty of issues for which strikes are appropriate, pensions reform isn't one of them.

Because it's not the government's fault that life expectancy has increased by 20 years since the pensionable age was set at 65 (60 for women). It's not the government's fault that at the time the default retirement age was set at 65 one person's pension was paid by 5 taxpayers and now it's less than 2 taxpayers. It's not the government's fault that the unfunded cost of servicing our public sector pension liabilities of £1.2 trillion is now running at about £45 billion a year — in effect a second, hidden deficit.

This was the problem facing Lord Hutton (a former Labour Pensions Minister) when he was asked by the Coalition government to lead a Pensions Review. Last week the chief secretary to the Treasury, Danny Alexander, took up most of Hutton’s proposals by announcing that the retirement age of public sector workers — other than those in the army and the emergency services — will rise from 60 to 66, and that state employees will on average have to pay 3.2% more in pension contributions.

However, this change will not be applied to workers on less than £15,000 a year, and those earning less than £18,000 will have their additional pension contributions capped at 1.5%, so the usual appeals to compassion cannot be easily made. 

What's more while no existing public sector employees will lose any accrued rights — that would be both illegal and immoral — final salary pensions will gradually be replaced by those based on career-average earnings; but the most valuable aspect of the traditional public sector pension — that it will be index-linked and guaranteed by the exchequer, no matter how high future inflation rates — will remain.

Historically, these gold-plated pension plans, along with shorter hours, longer holidays and greater job security,  have been compensation for the lower salary one could expect in public service compared to those of equivalent rank or skills in the private sector.

However, 13 years of Labour rule saw public sector pay increased to the extent that recent research by the Policy Exchange think tank, based on figures from the Office for National Statistics, shows there is now a significant premium in pay for taxpayer-funded workers, whether measured by both mean and median annual salaries, or by typical hourly wage rates.

When you add the value of an index-linked final salary pension, the employment market is further distorted. Last year the Public Sector Pensions Commission, after a nine-month investigation, concluded that “the true value of the [unfunded] ... public sector scheme ... is over 40% of salary”. In other words, in order to acquire the same benefits in retirement, a private sector employee would have to pay 40% of his salary in contributions (his employer certainly won’t).

It's important we look at this further. Britain has a workforce of around 30 million workers. Around 25 million of those work in the private sector with 5 million the public sector. The average private sector employee has a pension pot of around £30,000 which is enough to buy an annuity on retirement at 60 of £900 a year.

So when Mark Serwotka, the leader of the Public and Commercial Services Union (PCSU) tries to attract our sympathy by pointing at the average pension of £6,000 a year that his members earn, bear that £900 a year figure in mind. Also remember that to get £6,000 a year means a pension pot of around £200,000 a year on the open market. The taxpayer has to provide that pension pot.

The question is, if the PCSU members (and, I have to say sadly, the teachers union members), won't pay the full market cost of their pensions, why should the nation's workforce, most of whom will not be benefitting from it, do so instead?

As I said earlier, there are many issues that  public sector workers could strike about. Job losses is one thing. Working conditions may be another. Teachers could walk out in protest at proposed cuts in educational provision. But instead the first strike may be about pensions reform. This is a massive mistake, and Ed Balls, the shadow chancellor, is spot on by saying that the Coalition government would rub their hands with glee if the public sector workers went on strike for this reason, as they would be able to claim the unions are harming the economic recovery, not the Coalition's policies.

Serwotka has tried out the familiar routine of declaring it it immoral that their members should pay for the consequences of a crisis caused by the idiocies of overpaid bankers. But they could throw all the bankers into the sea and not solve the pensions crisis.

Private companies have long ago stopped final salary pensions for their employees, as they would make them bunkrupt. With pensions, the government can't get trapped into promising its employees more than it could possibly recoup from the taxpayers.

There are two ways to solve the pensions crisis. Stop people living longer by turning back medical advancements and possibly well targetted euthanasia. Or we can get real and cut down the gap between the contributions public sector workers make to their pensions and how much they receive in income from their pensions.

Which one makes sense? Even though it reduces my own income in retirement, I know the answer.

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