An Old Age Trick

October 7, 2010

There are few more nauseating terms in the British political world than the claim that public sector pensions are “gold plated.”

Even Lord Hutton, the ex-Labour Work and Pensions minister, who has been asked by the Coalition to report on public sector pensions, maintains that any gilding is restricted to a tiny minority of bosses.

Hutton, taking aim at your retirement

Speaking to the Today programme, Hutton said that “it is wrong to say that public service pensions are gold-plated. The average pension paid to pensioner members is about £7,800 a year. About half of pensioners receive less than £5,600 a year. And 90% of pensioners receive less than £17,000 a year.”

Hutton calls such amounts “modest.” But a pension of £7,800 per year is less than modest.

Despite his reservations about the language used to describe public sector pensions, Hutton has produced a report that will be used to attack the entitlements of public sector workers who, as TUC leader Brendan Barber puts it, “are facing a pay freeze, are in fear of their jobs and working harder to cover staff who have not been replaced.”

Hutton wants the retirement age for public sector workers to be raised universally to 65 (many retire at 60 as it stands), and for pensions to be linked to average earnings over the claimant’s career, not on final salary as is currently the case.

This will result in a loss of pension income, and comes on top of the switch from using the Retail Price Index (RPI) to calculate pension entitlements, to the Consumer Price Index (CPI). The CPI is now being used purely to reduce the amount paid into pensions schemes, as it excludes housing from the cost of living – a cynical piece of accountancy.

There is no doubt that this is unnecessary. As with so many cuts proposed by the Coalition, provision of public services (like pensions) can be funded through increasing the amount of tax paid by the wealthy and by reducing tax evasion, or by cutting projects such as the war in Afghanistan or Trident that are both expensive and unpopular.

As with benefits – the “cost” of the payment to claimants is also more complicated than it seems. Money paid into pensions for use today, is money paid directly into the economy, often to small businesses or tradespeople while it filters into wage packets if spent via corporations. A large amount is lost to the economy via diversion to shareholders and repatriation of profits to foreign countries, but the amount that remains is both a “cost” – in that the taxpayer had to supply it, and a credit, in that the money is earned by another taxpayer when it is spent by the pension holder.

Much of the money paid into pension schemes is also spent by government on infrastructure projects and public services, unlike the pensions of private sector workers (and public sector workers in many nations) which are managed by pension funds and provide a subsidy to investors in corporations by stabilising the market – one reason why public sector pensions are so despised by the business press in the UK.

This is part of the real “cost” of pensions that the government and Lord Hutton worry about. Another is the cost of labour. As Hutton says, “The case for reform [of public pensions] is clear” as relatively generous pension entitlements “[act] as a barrier to free movement of employees from the public to private sector.”

Employers are worried that workers will not wish to transfer their skills and labour to companies that have been shedding pension commitments. Fund managers want to access the pensions of public sector workers for investments across the world (which would, by the way, be far less beneficial for small businesses in the UK than the current state-managed model).

This is the real crux of the pensions question – how big businesses can offload obligations to ex-workers and reduce the cost of labour in the present, and how they can gain control of the public pension pot.

Talk about a public sector pensions time-bomb is a convenient way of convincing the public that reforms are urgently needed. But it is not sensible. Some talk about pensions as if the cost of maintaining elderly ex-public sector workers is about to bankrupt Britain. They point to the gap between the amount paid out to current claimants and the amounts currently paid in, seeing a widening chasm that will result in a mountain of obligations growing ever higher as life expectancy rises and claimants increase.

This is disingenuous at best. As the TUC points out, if public sector pensions currently seem expensive, this is a situation that has been artificially created by the economic crisis. It argues that while in 2009/2010 the RPI was around 5 percent, increasing the cost of benefits, a public sector pay freeze was instituted, reducing the amount paid into pension schemes. Hence the gap between the amounts paid out, and those paid in, temporarily widened, making the general cost of pensions seem greater than it usually is.

Ironically, if Hutton’s recommendations are implemented by the government, the cost of providing pensions for public sector workers may actually increase over the medium term – challenging the relevance of pension reform in tackling the national debt. As the TUC argues, defined contribution (DC) pensions would require individual pension “pots” to be built up with money that would have been used under the final salary scheme to pay current claimants. But, current employees will continue to graduate onto the final salary scheme, resulting in a “double whammy” as the state pays for the DC schemes and the current pensions.

This is clearly a duplicitous policy, carried out for ideological reasons, but also for pragmatic business reasons. What it isn’t is a serious attempt to establish fairness in pensions across the board and tackle poverty amongst the elderly. It is a mean-spirited attempt to equalise the misery to be experienced by public and prvate sector workers alike.

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