Public sector pensions

I don’t know the details of the public sector pensions, but I do have a lot of support for those who are planning to strike. As far as I’m aware people accepted (and were offered) jobs in the public sector that had generous pension schemes. I read somewhere that in fact the member’s contribution was generally 5% of their salary and the employer’s contribution was maybe as high as 20%. This is effectively part of their salary package. When they retire they should therefore effectively have a large pot of money from which to draw a pension. Fundamentally, therefore, changing public sector pensions is very unfair on those who accepted jobs with this pension as part of the deal and is effectively a large cut in their lifetime salary.

I must admit, however, that I had always assumed that public sector jobs were typically jobs in which you might earn less than you could (for an equivalent job) in the private sector but in which the benefits were more generous. Overall, it might therefore be equivalent. Private sector pays you a higher salary but doesn’t have a good pension scheme (or job security) while the public sector offers a lower basic salary but better pension and more job security. If this is no longer true and if the basic salaries in the public sector compare well with those in the private sector, then maybe it is now unfair if public sector jobs also offer very generous pension schemes. This, however, doesn’t necessarily mean that the pensions need to be reformed, it means that we should be looking at the total (lifetime) benefit or working in the public sector compared to the private sector and deciding if there is indeed a problem and if so does it suggest changes to the salary structure, to the pension scheme, or to something else.

I do have a rather cynical view that the reality is a little different to what I describe above. As far as I’m aware, the public sector pension scheme is unfunded. Ideally workers (and often their employers) contribute to a pension fund. In many cases this might mean that, annually, something like 15% to 20% of every member’s salary is paid into the fund. This money is invested and also used to pay current retired members pensions. As long as the fund is well vested this is fine. In the public sector, however, I believe that there is no actual fund. The idea is simply that pensions are paid directly by the government. However, public sector workers took jobs with a promise of a reasonably generous final salary pension scheme that would be equivalent to one in which 20-25% of their salary was paid into a fund. In theory there should be a well vested fund. That the government chose not to actually have a fund seems irrelevant. It certainly seems as though they are using the proposed changes to the public sector pension schemes as a mechanism for reducing the deficit in a way that is neither completely honest not fair.

I should add, however, that if it is indeed the case that the overall benefit (which I regard as lifetime earnings – total salary plus pension) of someone in the public sector is now greater than that of someone (equivalent) in the private sector, then this may well need to be addressed. I do feel that it is quite reasonable that we could have one sector that pays lower salaries but offers better benefits (job security plus pensions) and another sector that pays higher salaries but doesn’t offer particularly good benefits, is quite reasonable. People in the various sectors probably have different motivations. To simply attack public sector pensions doesn’t, however, seem like a reasonable and fair thing to do. If you take away the good pensions we may find that higher salaries are required to attract good people into the sector and we really save nothing at all.


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