As populations age, pensions becomes an important determinate of consumer income. It works in two ways. One sector of society has to pay more tax to pay pensions (hence has less income to spend). Another sector of society receives their fellow citizen’s tax as their income.
When the balance between these two groups of people is disturbed; problems result. In the UK this relationship is under severe strain. What follows is an article from today’s FT by Martin Wolf – the economics editor.
I have probably broken all of the laws of blogging and publishing by producing it in fall (it is on subscription). He tells a sorry and frightening tale. The UK is not alone having this problem.
Tony Blair is sometimes considered Baroness Thatcher’s heir. This week he proved he is no Thatcher. Lady Thatcher’s defeat of Arthur Scargill’s miners re-established the British government’s ability to govern. But Mr Blair has now allowed the government to be defeated, without a shot being fired, over public sector pensions – an issue that is not only important in its own right, but on which the government was unquestionably right. The bosses of the public sector unions have seen the government turn tail. They will not forget the spectacle.
Why, then, is the retreat over the age of retirement in public sector pensions so important?
To start with, it is dreadful pensions policy. At present, public sector workers are guaranteed index-linked pensions from the age of 60. The guarantee comes at the expense of the rest of the population, the vast majority of whom cannot dream of such generosity. Half of those now left in final-salary pension schemes work in the public sector, even though the latter employs only one-fifth of all workers. Moreover, few even of the lucky private sector beneficiaries of such schemes can expect to retire on comparably generous and secure terms.
Not only does everybody know that life expectancy is rising all the time, but real interest rates are also exceptionally low. For both reasons, the cost of public sector pension commitments is soaring. The Pension Commission, under Adair Turner, estimates the present value of the public sector’s pension liabilities at £500bn, which is more than its entire overt net debt.
My calculations suggest that the value of the public sector pension promise is at least equal to 25 per cent of gross salary. It could well prove much higher. Already, public sector pensions cost 1.5 per cent of gross domestic product. This is due to rise to 2.5 per cent. Yet public spending on all other pensions is forecast to remain roughly constant as a share of GDP. The contrast is intolerable.
Everybody who has thought about the topic – including the government itself – recognises that a delay in retirement is a logical part of the solution. What are needed then are sensible renegotiations of existing plans, not just in the public sector but also in the private sector. Instead, the position of all current public sector workers is apparently to be protected at the expense of those the public sector seeks to recruit and of taxpayers. It is impossible to imagine a worse, or more inequitable, policy.
The defeat is also a failure in managing the public sector. Once the public sector unions believe the government is terrified of confrontation, hopes of reform will vanish. A clash has always existed between the public and public sector workers over whose interests are served by public services. Since most public services are monopolies, the only effective counterweight to the interests of those who work in them is a credible and tough-minded government. Yet that is precisely what the government has now shown itself not to be.
This surrender is particularly lethal for the Labour party, since inability to manage public services threatens the party’s most fundamental goals. As the excellent new economic survey of the UK by the Organisation for Economic Co-operation and Development makes clear, the public sector has accounted for about half of all new jobs since 2000, while the ratio of public spending to GDP reached 44 per cent in 2004, up from 40 per cent in the late 1990s.
Yet the increase in the outputs the public values seems to be well below the increase in inputs. Almost everybody knows that the answer must be big reforms, including injection of greater competition. The chances of this are far smaller today, now that the unions know they need only stamp their feet to watch the government run.
Yet the biggest implications by far are constitutional. Let me be frank: the public sector unions have used their monopoly power to demand money with menaces from the taxpaying public. It is because strikes by producers of a valued public sector monopoly can hold the public to ransom that they are both so effective and so constitutionally subversive. If successful, they mean that it is no longer the elected government that determines the pattern of public spending and taxation, but its employees. This way lies enfeebled government and, ultimately, anarchy.
What then should the government have done? It should have fought hard for a reasonable compromise. If it failed, it should have braced itself for the strikes. It should then have let the unions explain that people were being deprived of services to force them to pay for the preservation of a privilege unavailable to all but a fraction of taxpayers.
Governments are the trustees of the public interest. They cannot let those they employ dictate to them. If the Labour party does not understand that, it will lose power. And it will deserve to do so.Dick Stroud
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