The British Government can solve its pensions crisis. But it doesn’t want to. Having spent all their lives trying to persuade everybody that they can offer something for nothing because somebody else is paying, all policians find themselves unable to break the habit. Having quietly seized exorbitant benefits at the general taxpayer’s expense (on the excuse that they are poorly paid, which isn’t true now, if it ever was), public sector employees are not letting go.
In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: “If you don’t work you die.”
– R.Kipling
An unfunded national pension scheme avaialable to the majority of the population is much like a Ponzi scheme: a pyramid ‘investment’ trick that is illegal everywhere–except when operated by governments. It depends on ever more suckers paying over ever more money (in this case, compelled by taxation) to finance the unfeasible returns promised to those entering earlier. The trimming of the Turner Commission just beds the con in deeper. We can expect a trivial postponement to distract attention from more pensions, more taxation, and a bigger future squeeze.
The simple (and only) solution is to follow the example of Bismarck when he invented the national pension. Convert an unsustainable Ponzi into a Tontine: a survivor benefit scheme. The pensionable age must be raised above the expectation of life, so that most people do not live to receive it. How much above depends on the benefits one wants to grant.
The corollary is even more unpalatable to politicans. The much more generous unfunded pensions for public sector workers, including themselves–unless they are to take an ever greater and ever more resented share of national income–must begin at *older* ages than the open national scheme. Until civil servants retire at 80+, and unfunded pensions for the general public start at 75, we will know the government (with both sizes of G) only cares about looking after its own, and that the vapourings about “crisis” are a just a smokescreen for more control over private income and savings.
And its the same with the Social Security scam in the States too !!
‘…the vapourings about crisis are just a smokescreen for more control over private income and savings’.
Quite. I would – and have – gone so far as to say that the very concept of private property is being incrementally abolished.
Drawing in the public sector pension scheme is a red herring if ever I saw one. The Public Sector Pension scheme is the equivalent of a contributory pension scheme, whereas the Turner Report discusses the state pension, a seperate benefit.
But I do suppose it makes it easier to vilify the public sector doesn’t it.
Both the State pension scheme, and the public sector pension scheme are unfunded, but the state pension scheme affects everyone.
It is going to be an issue and my main concern is that those of us who have provisioned for ourselves will potentially end up having to subsidise those who haven’t.
Your Tontine scheme would fail. Reason: expected lifespan can be expected to rise non-linearly in the near to medium term. By AD 2105 there probably won’t be an expectation of death due to age. Some people alive right now will live to see AD 3000. Regardless of the methodology, a pension scheme will break. This is why I don’t have one and don’t want one. They’re a bad investment.
“Both the State pension scheme, and the public sector pension scheme are unfunded, but the state pension scheme affects everyone.”
As a tax payer they both affect me. The difference is that while I am forced to contribute to both I only have any prospect of getting a small return from one of them.
As Chaos points out there is deliberate conflation of two issues here: the universal state pension and the public sector employee pension schemes. The latter is in principle the same as a private sector company pension scheme, and is a benefit of employment established in contract (hence the desire of public sector workers to hang on to it, and hey, I thought the one of the first duties of a minimal state is to uphold contract), just like a company pension, health provision, company car etc when you work for a large corporation. Of course it is paid out of general taxation but then so are civil servants salaries.
That doesn’t justify the size of the public sector in the UK or level of taxation or whatever – but its still being confused by the shrill tone of the debate at least here in the UK.
Chaos:
The Public Sector Pension scheme is the equivalent of a contributory pension scheme,
Oh no it isn’t. I did draw in the public sector, but not the ‘Public Sector Pension’ scheme. There isn’t in fact one public sector pension scheme but dozens of them, all with different rules and wrinkles. “Unfunded” doesn’t mean “probably insolvent” (the current position of many private sector contributory defined-benefits schemes), it means that the money to meet payments is not found from a fund made up of previous contributions. Whether you notionally contribute to an unfunded scheme or not makes no difference to its unfunded nature: somebody else is paying for your benefits.
There are funded public sector pensions schemes: CalPERS is getting on for the world’s largest investor. But I couldn’t point to a single one in Britain, outside nationalised industries.
Personally I don’t like pension funds any more than I like superannuation by expropriation. I think creating a heavily privileged class of investment funds (and therefore too a class of investment manager) subject to very elaborate regulation is bad for the individuals whose savings get locked-up that way and made subject to indirect management and intermittent raids by the Treasury; bad for everybody because of its corrosion of competition in financial services.
… a benefit of employment established in contract
Except that you can’t make a contract in which the contracting parties enforcibly agree a third party will pay for its performance. If public sector bodies could go out of business, I’d agree with you–in fact I might regard all their grossly wasteful practices with a bit more benignity, if they were hastening them towards extinction.
If I offer to buy a watch from you with the proceeds of mugging, then should you be entitled to sell me the watch anyway because we have a contract, and contracts are sacred? If so, how’s that different from if the watch is stolen?
A crown servant can retire at one of a number of points and rx their pension on the basis of that, they still can’t draw their state pension until they’re 65 (at present).
And yes, many schemes, a reflection of the organic growth of government, which probably needs a damned good rationalisation anyway.
And as to many schemes potentially being insolvent, I would tend to agree that the reasons for that are down to a number of things, but the treasury cut is one of the more significant ones. But it’s a choice. One can choose a lower salary through ones career on the basis of a lower risk payment structure at the end, or accept a higher level of reward, but a higher risk return. Personal choice and a reflection of the risk appetite one wishes to hold in the market.
What so you mean the contractual obligation on government to pay for a civil servant’s wages is not binding or possible (which is self-evidently is)because it depends on a third party being forcibly expropriated through taxation? Or am I missing something?
I think you are drawing a distinction between what’s legal and what’s ‘right’ here – which is fair enough. But that distinction should be clear.
@chaos, the state pension is ( i believe i was conned at an early age) by our nat insurance contributions. The Chancer of the Exchequer, should confirm that NOT.
I was actually talking to Adair Turner, author of the Pension Commission report (namedropper, ed) and he frequently remarks on how bad is financial literacy among Joe Public. I actually think that things have got worse since the Welfare State seriously undermined personal savings and the old Friendly Societies in the early 20th Century. These old, now-forgotten institutions actually encouraged even the poorest labourer to think about saving and investment long before anyone had heard of “consumer finance”.
It is a tragedy in that institutions created by trade unions, churches, or just groups of people together, have been destroyed by an unthinking desire for a “neat” state solution. Think what might have been: a strong accumulation of capital across the whole working population, and a strong, embedded culture of self reliance and property rights. And we deliberately shafted it.
James,
You could say I’m drawing a distinction between the individual and the collective. The individual civil servant may be entitled to enforce his or her contract, but the process of collective extortion that leads to that contract is illegitimate. We should have no respect for the deals between government bodies and government unions.
Further, if I offer to pay you using other people’s money and you are aware of it, that makes us co-conspiritors in a fraud. Now of course all government employees have to be paid with other people’s money, and some government is necessary: you can argue that in a democracy voter-taxpayers only have themselves to blame for the current size of the public sector. The difference is, I submit, is that writing a blank cheque on future budgets is fraud on future voter-taxpayers. Whereas a worker can be made redundant, a pensioner can’t.
Yes I see what you are saying – though it partly depends on your view of collective action as to whether such deals are illegitimate or not.
I wouldn’t worry about the pensions deal though, which isn’t worth the paper it’s written on. As soon as any half-way sane exchequer gets the chance they’ll raise the public-sector pension age and if feeling very lucky alter the basis away from defined benefit (final salary is going as part of current proposals anyway) for new entrants.
Jonathan, financial literacy might well be bad among the general public but we mostly trust to our banks, insurance companies and other advisors to set us on the straight and narrow in these matters. That would seem to be the problem – your average Joe Barclays doesn’t seem to know very much about pensions at all these days, apart from the stock response “your employer organises that, don’t they?” that most ‘personal finance assistant’ staff are capable of.
Turner’s report didn’t do very much for me apart from really confirm that there ain’t much state cash left in the kitty for those who mistakenly trusted the Great Socialist Experiment, by paying into the National Insurance pot of gold all their lives in the vain hope that paradise beckoned in the sundown of their years through the promised massive pension paychecks. Rather than promote the concept of an NPSS I would have hoped for something a bit more substantial from him, more akin to telling the Treasury to gradually abandon the system and transfer their aim more towards better or unified financial controls for private pension schemes.
I do apologise, that should have read,
Julian, of course I do agree with you. Frankly, some of the people I have dealt with in the past I would not trust to pour an electric kettle, never mind run my meagre savings.
I’m afraid the amendment makes little difference to me, Julian. Private personal savings and investment is one of those areas that already suffers from chronic incentivitis… witness today’s glorious announcements of “real estate investment trusts to increase funding for new property investments”, “shared equity plans to help first time buyers get on the property ladder”, a “film tax credit”, and “unclaimed assets” being seized for “youth and community facilities”.
Given that so few people understand finance, there’s ground for some consumer protection against fraud (though that’s unlikely to be highly effective while the biggest fraudster in the field is HMG). But I suggest that telling you how to invest your own money is as little the legitimate sphere of government as telling you what to eat.
Re Guy Herbert. AFAIK the local government pension schemes are funded schemes.
They are employer schemes like company schemes and have suffered from Gordon Brown’s tax credit smash and grab and the general fall in stock prices and are now largely facing similar deficits. The fact that local government terms are far more generous just means that the crunch will come earlier than with many private schemes. Of course the liabilities still exist and will fall on the local taxpayer in higher council tax to make up the shortfalls. It seems rather obscene that current pensioners are being squeezed through the Council Tax to pay for the future pensions of council workers who are still receiving a salary and could be expected to contribute more themselves but that is what is happening.
“They denied that the Moon was Stilton; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.”
Indeed, which was the point of my original quotation. Just as long as no-one is fooled by the word ‘market’, it is an important text for any rationalist conservative.
Kipling’s “Gods of the Market” are snake-oil sellers: politicians and others who sell empty wish-fulfillment, or promise the world can be perfect if only we give up the evidence of our senses and do what they say. He is not suggesting that buying and selling themselves are bad, but warning caveat emptor.
Local Government and University staff pensions are funded. As far as I know these are the only funded public sector pensions.
Government interference in local government pensions has a long history. Margaret Thatcher treated them not as independent funds but as part of local government. At a time when investments were doing well, the conservative government forced local authorities to stop contributing to the funds by effectively deducting the contributions from the Rate Support Grant. Relatively large numbers of redundancies in the 1980s of senior staff also put a severe strain on the funds, because in most cases the actuarial cost of early retirement was not properly accounted for.
Setting aside all the other arguments about the public sector, this interference was the start of the slippery slope. Again as far as I know in the 1960s the employer and employee contributions were both around 6%. By now it can reach 20% or more.
The idea of a fund is surely to cover the bad years with the good, evening out variations over time. It would be interesting to know what the performance of those funds would have been without that interference from central government.
There are also a lot of myths and untruths being peddled about the public sector occupational pensions, including the idea of the right to retire at 60 on full pension. This isn’t the case. Full pension entitlement is based on an assumed working life of 40 years. To retire at 60 on full pension would mean an uninterupted career in the public sector from the age of 20. That only applies to 10-15% of employees – if that. If you only work 20 years instread of 40 you get half the pension – which equates to 25% of your final salary (or the average of the last five years in some schemes).
It is perfectly understandable I think that someone who has contributed a not inconsiderable amount into a pension over a number of years will seek to protect that benefit. They have freely entered into a contract and they expect it to be honoured. No amount of posturing about ‘expropriation’ is going to alter that. If there is a crisis – and I’m not entirely convinced of that – we need an answer which so far as possible doesn’t penalise people for being born at a particular time.
[declaration of interest – I am in receipt of a public sector pension]