Unfunded public sector pension liabilities rise again

October 25, 2007 10:58 AM

The Telegraph reports that the official estimate of unfunded public sector pension liabilities has risen to £620 billion, up from the previous official estimate of £530 billion. This works out at around £30,000 per household over the next four decades.


Of course, the official projection is at the low end of the range of estimates that have been produced. Watson Wyatt puts the figure at £960 billion, while former Bank of England economist Neil Record, in a recent paper for the Institute of Economic Affairs, estimates the total liability to be £1,025 billion - around 80 per cent of national income.


Whatever the true figure, you can be confident of two things:


1. It's going to be closer to the IEA and Watson Wyatt's estimates than the Government's.
2. There will be no escaping from the bill to taxpayers.


This needn't be the case if our politicians were slightly more imaginative. Here are two suggestions:


1. Raise the public sector retirement age to the state pension age for existing public sector workers as soon as possible. This is completely fair, given that public sector workers no longer earn less than their private sector counterparts. It is not, as the unions claim, a breach of contract, any more than the decisions to raise the state pension age are a breach of the national insurance contract. Let's have equal treatment for public and private sector workers. This should reduce the unfunded liability considerably.


2. Get serious on restraining public spending. This means abolishing individual agencies and programmes that are unnecessary, rather than merely shuffling the deckchairs (as in the Gershon process), and in the case of the re-named DTI abolishing whole departments. This will allow taxes to be reduced and the deficit to be eliminated. Part of future budget surpluses can then be put into a special "Future Fund" to pay off part of the remainder of the currently unfunded liabilities, as Australia is doing at the moment.


If these two suggestions are enacted, the amount left over will be drastically reduced, making life easier for taxpayers.  So which Party will get serious about public sector pensions? The problem is not going to go away.

The Telegraph reports that the official estimate of unfunded public sector pension liabilities has risen to £620 billion, up from the previous official estimate of £530 billion. This works out at around £30,000 per household over the next four decades.


Of course, the official projection is at the low end of the range of estimates that have been produced. Watson Wyatt puts the figure at £960 billion, while former Bank of England economist Neil Record, in a recent paper for the Institute of Economic Affairs, estimates the total liability to be £1,025 billion - around 80 per cent of national income.


Whatever the true figure, you can be confident of two things:


1. It's going to be closer to the IEA and Watson Wyatt's estimates than the Government's.
2. There will be no escaping from the bill to taxpayers.


This needn't be the case if our politicians were slightly more imaginative. Here are two suggestions:


1. Raise the public sector retirement age to the state pension age for existing public sector workers as soon as possible. This is completely fair, given that public sector workers no longer earn less than their private sector counterparts. It is not, as the unions claim, a breach of contract, any more than the decisions to raise the state pension age are a breach of the national insurance contract. Let's have equal treatment for public and private sector workers. This should reduce the unfunded liability considerably.


2. Get serious on restraining public spending. This means abolishing individual agencies and programmes that are unnecessary, rather than merely shuffling the deckchairs (as in the Gershon process), and in the case of the re-named DTI abolishing whole departments. This will allow taxes to be reduced and the deficit to be eliminated. Part of future budget surpluses can then be put into a special "Future Fund" to pay off part of the remainder of the currently unfunded liabilities, as Australia is doing at the moment.


If these two suggestions are enacted, the amount left over will be drastically reduced, making life easier for taxpayers.  So which Party will get serious about public sector pensions? The problem is not going to go away.

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