Saturday, 16 February 2008

Public sector pensions

There are two ways of looking at the cost of public sector pensions.

One of them is to look at the total accrued liability as ably and entertainingly explained by Neil Record. His figure of £1,000 bn-plus is perfectly reliable but it's all a bit technical for a 'blog such as this.

The other, more simple way is to look at the current cost, and ask, if the government were a normal private sector employer, how much would it have to put into a pension fund every year to totally cover the future cash cost?

All this clever discounting that Neil Record does can fall by the wayside - you can safely assume that your salary will increase by 2% more than inflation each year, and equally that the appropriate discount rate to apply to future Government liabilities (i.e. those backed by the UK taxpayer) is about 2% above inflation, so let's ignore inflation/salary increases on one side and inflation/discounting on the other.

Right, let's take Teachers' Pensions. If you check the box for new joiners, you will see that after thirty years, your pension entitlement is exactly half your final salary.

Let's assume you start teaching at 25 this year and pack it in at age 55 (the minimum pension age, except in cases of ill health). By that time, your average life expectancy will be another thirty years, according to the Government's Actuary's Department . So really, you will be paid half as much again in retirement as you earn while you are working.

So a teacher on a nominal salary of £30,000 is really earning £45,000. OK, you could knock that current salary down by 6.4% to account for the deduction from the teacher's salary, but I doubt that this goes into the official statistics.

Right, let's assume that all the other civil service and public sector pensions are the same, this means that the true cost to today's taxpayer of the public sector is an extra 50% on top of the official cost of public sector salaries.

There are anywhere between 7 million and 8.2 million public sector employees, depending on whether you believe column E or column M of this, call it 7.6 million for sake of argument, on a median salary of £498 a week as at a year ago*, call it £508 as at today, makes total annual salaries £200 billion, so half again on that is £100 billion.

Each and every year.

To be paid by 30 million taxpayers, so that makes over £3,000 a year each.

In perpetuity. Because for every one that retires another one joins.

But that notional contribution of £100 bn doesn't go anywhere in real cash terms, it just gets put on the never-never. Turning back to Neil Record's actuarial approach, the net present value of an annual £100 bn liability discounted at 2% is £5,000 billion, or about three or four times gross domestic product. So his estimate of £1,000 bn is pretty much at the lower end.

* Scroll down to the very end of this - rather interesting is the fact that the median private sector salary was only £439 a week. Hmmm.


dearieme said...

Are you really saying that teachers get a full pension after only 30 years? And they can draw it at 55 without actuarial reduction? Cos, if so, why?

Mark Wadsworth said...

I think there is some actuarial reduction if you retire at 55 - unless you can prove it's for health reasons - RSI anybody? Stress?

My figure of £5,000 billion latent liability is clearly overstated, but I'd like to see somebody try and whittle it down again to Neil Record's figure of £1,000

david said...

The teachers, NHS and civil service schemes are actually the least generous with full pension available after 40 years' service. The police and fire service schemes are far more costly providing full pension after 30 years' service; also many of their members retire early on ill-health grounds with enhanced benefits. Don't forget that the taxpayer also subsidises the pensions of NHS GPs and dentists, who despite being self-employed contractors enjoy preferential treatment via the NHS scheme.