Friday, October 08, 2010

Public sector pensions: why protect them?

Public sector employees should pay more for their pensions, according to a report by Lord Hutton. The BBC covers this story here. An excerpt:

"[. . .] Members of public sector pension schemes should pay higher contributions, says an independent commission led by Lord Hutton. It is his first short-term recommendation for making savings in the increasing cost of public sector pensions, due to rising longevity. The schemes cover millions of public servants including those in the civil service, NHS, and local government. Lord Hutton is also considering other fundamental changes in the longer term. Final-salary schemes are "fundamentally unfair", he told the BBC.

[. . .] Many public sector workers argue that they have accepted lower pay than they could get in the private sector in order to benefit from better pension provision. But Lord Hutton rejected this: "There is no evidence that pay is lower for public sector workers to reflect higher levels of pension provision," he said. Among the longer term changes being considered by Lord Hutton's independent public service pensions commission are:
* changing the public service schemes from a final-salary to a career-average structure
* copying the Swedish and Dutch examples of defined-contribution schemes
* raising normal pension ages beyond their current levels - typically 65 - as longevity increases. [. . .]"

While much has been said about the fairness of these proposals, I hope that certain arguments receive some attention from political commentators.

1. Most public sector employees earn less than the average "public sector" salary.
There is much talk about how high public sector pay is on average. The problem is that a great number fall well below this average. Why? The "public sector" is a large body including a variety of jobs both blue and white collar, as well as the BBC and its television and radio celebrities. Some earn a great distort that may give a misleading picture of what public sector employees actually earn.

2. The "public sector" is an eclectic mix.
Normally, we might think of nurses, teachers, police officers, etc. as members of the public sector. This is certainly true. Yes, the public sector includes quango bosses and politicians. It also includes entertainers with the BBC. When we speak of the public sector, we should be aware that we are talking about a highly diverse group.

3. We should not treat all in the public sector the same way.
Therefore, we should have reason against treating all public sector employees the same way. Perhaps a higher contribution is necessary -- but why impose it across the board as if this was a fair policy for all affected? In fact, this is patently unfair as it will disproportionately hurt those in lower income groups more than those in higher income groups.

4. Public sector employees: should they be treated as if they worked in the private sector?
It has been argued for several weeks now that public sector pay may be too high. The argument has been that public sector workers work in the public interest, that their work is some kind of national service. Public sector workers ought to earn less than those in the private sector given the nature of this work. Therefore, the problem is not that institutional heads may earn more than the Prime Minister per se, but it is claimed that it is problematic when these heads lead public sector bodies.

Now enter the Lord Hutton report. His report appears to claim that public sector workers do not earn less than they might in the private sector. This is why their pension contributions should rise.

So which is it, David Cameron and Nick Clegg? Either public sector workers should be treated just as private sector employees -- as per Lord Hutton's report -- and "high" pay in the sector is entirely permissible. Or public sector workers should be treated differently given the nature of their work. If we accept this latter view, then changes to the pension contributions become more problematic. However, it is likely that the coalition may back the former and, if so, then they should not oppose public sector workers earning every bit as much as those in the private sector.

They shouldn't be able to have their cake and eat it, too. Either they side with the public sector's unique mission and defend its pension scheme or they give up their popular rhetoric against public sector pay in raising pension contributions.

Which will it be?

UPDATE: This post amends and replaces an earlier post here.


Anonymous said...

What a wonderful post--I have made the same arguments in my own state of Wisconsin (I am a UW System employee).

The Brooks Blog said...

Thank you very, very much!