Saturday 28 October 2006

Providing for the serf-owning class

I've been reading Sir Humphrey's Legacy, a new book from the IEA.

Neil Record's argument is that:

Official estimates of public sector pension liabilities do not use sound accounting or actuarial methodology and, as such, they woefully underestimate the true liabilities that taxpayers owe to public sector workers in the form of future pensions.
Shockingly, Mr Record thinks that the real liability is £1,025 billion - £1,025,000,000,000 in real money. The government says that the liability is only (!) £530 billion.

This means that the employer's contribution to public sector pensions represents a far larger addition to the basic payroll cost than we would have expected:

When calculated correctly, the cost of pensions in the public sector varies from 35 per cent of salary for male teachers to 72 per cent of salary for policewomen.
In the book's commentary, Nick Silver, an actuary, thinks that even Mr Record has underestimated the costs when we make certain adjustments to do with tax rates. If you are a standard rate taxpayer, a typical civil servant's pension contribution is costing you 47.9 percent on top of the basic salary cost of your "servant". (36 percent using Mr Record's method.)

Mr Silver gives these figures for 2005:

Public Sector pensions

Liabilities £1,025 billion
Assets nil
Members (in millions) 6.7

Private Sector pensions

£1,070 billion
Assets £630 billion
Members (in millions) 14.9

The private sector is almost 60% "funded"; the public sector is unfunded.

The new FRS17 accounting standard now makes companies incorporate pension fund assets and liabilities into their balance sheets. That's why British Airways has been described as a dodgy pension scheme that also flies a few jets. Actually, it's now a dodgy Christophobic pension scheme that also flies a few jets! To be fair, this isn't entirely the fault of BA or of other companies with huge pension deficits. A big chunk of the problem is Gordon Brown's tax raid on pension funds made as soon as Labour came into office in 1997. Reversing that would fix most of the problem for the private sector.

But Gordon needs all that cash to pay for the massive public sector benefits. Look at Mr Silver's chart again. Divide £1,025 billion by 6.7 million. The average pension liability per "public" worker is £152,915. In the private sector it's £71,812. The public sector pension costs are so much higher because the benefits far exceed those typically found in the private sector.

Does any of this matter - apart from the damned unfairness of the whole thing? After all, the government can just pay future pensions at the time out of current taxation. I think it does matter. An aging population implies extraordinarily high levels of taxation in the future. We should be treated like adults and be told the true size of the liabilities that are being incurred. The private sector must disclose almost everything. Why won't the government?

1 comment:

David Farrer said...

Comments made on previous template:

Bob Doney
"do they mean the old (sensible) British one 1,000,000,000,000 or the new (nonsensical) American one 100,000,000?"

You dropped a nought. In Newspeak a billion is one thousand million -1,000,000,000. A trillion is a thousand billion - 1,000,000,000,000.
31 October 2006, 00:24:37 GMT – Like – Reply

David Farrer

I think that the US definition is almost always used nowadays. If the IEA were using the old British meaning the public sector pension pot per person would be astronomical!
30 October 2006, 22:10:46 GMT – Like – Reply

By the way, I meant to ask, when the Government use billion, do they mean the old (sensible) British one 1,000,000,000,000 or the new (nonsensical) American one 100,000,000?
30 October 2006, 20:08:51 GMT – Like – Reply

It was 30% in 2005.

And the public sector is 50% of the economy.
30 October 2006, 20:06:53 GMT – Like – Reply

james higham
No votes in it and they aren't accountable. Why do something if you can't be had up for it?
29 October 2006, 17:47:50 GMT – Like – Reply

Bill (Scotland)
Why won't the government?

No votes in it, old boy, specially in a country with one adult, one vote. I can't remember the exact percentage of people in Scotland who in one way or another are in the employ of the State, but I know it is pretty substantial and in the area I live in (Highland) pretty huge, overall much higher than in the rest of the UK. It's why Labour has been in power in places like Glasgow, Newcastle, Manchester for a LONG time. Did you see the actuarial calcs last week about the true effect of the changes immediately after the '97 election to tax relief on dividends and how this affected private pension funds; previous calcs implied an effect of about 40bn or so, whereas the new assessment is that it has been at least 100bn; thank goodness my pension is not UK-based. The high-profile issue of MP index-linked pensions on an extremely generous basis is only the tip of a massive time-bomb for the future financing of 'UK Inc'.
28 October 2006, 20:15:03 GMT+01:00 –