The government is right to address the pensions issue

Firstly, let’s separate out two different issues relating to pensions – the pension entitlement (essentially a benefit), and public sector pensions (part of a contract between the government and its employees). The Coalition government has made proposals relating to both this week, which is likely to confuse the issue of how specific measures might decrease deficit spending/government liabilities.

Both are Pay As You Go (PAYG) schemes – where current payments are funded from the contributions of those who currently work – and both will become more difficult to fund in future years, largely for demographic reasons.

The are several problems for governments looking to tackle the issue of pensions – for example, people often don’t know the true value of their pension entitlement as it relates to a period a long way in the future; and older people are disproportionately vocal on the issue because it affects them currently, but any concessions we make to existing older generations makes it harder to rectify for future generations.

On State Pension Entitlement, the medium-term choice facing government is harsh – restrict pension entitlement to a shorter period of people’s lives (by raising the age at which the entitlement kicks in), or spread the benefits more thinly (i.e. pay less to each pensioner each week). It really is as stark as that, and the problem will get worse as the baby-boomers start retiring in this decade. (PwC did a good report on the impact to public sector debt if we don’t address this structural problem – and it would make the financial crisis look small by comparison). It is understandable in the context of better healthcare and the fact people are more active to a later stage in life that delaying the start of the benefit, rather than cutting the value of the benefit to each individual, is the preferred route.

I always thought Labour could and should have done more whilst in power to address the impending pensions crisis. I’m glad that the current government is speeding up measures announced by Labour, and thinking of going further. Linking the age at which state pensions kick in to average life expectancy – a measure which the current government is looking at – is a bold move, but one which I would support. Such a link reduces the downside financial risk to government/taxpayers of having to fund pensions over an ever increasing period of time, and ensures what limited resources are available to pensioners go further. Aligning the retirement ages of men and women is right and we should also make it easier for older people to carry on working, if they want to.

Of course, some of the problems which may occur in future in relation to state pension affordability will be directly consequence of measures they propose to introduce – in particular, the cap on non-EU economic immigrants will reduce the UK’s ability to afford pensions, for example by preserving the replacement ratio (roughly the ratio of the working age population to pensioners). This is another reason why that particular barmy proposal ought to be opposed.

As young people, it is important we contribute to the debate. After all, we are the generations which will have to fund baby boomer pension entitlements as well as face reduced entitlements ourselves. The short-sightedness (or selfishness?) of older generations isn’t a mistake we should repeat. When you add in funding our university education, environmental problems, and the massive transfer of wealth to them via housing stock, I think we are entitled to feel short-changed but it is important to address structural issues in our pension funding to avoid selling future generations down the river. (See David Willet’s book The Pinch for more on some of these intergenerational travesties).

Public sector pensions, on the other hand, are an altogether different beast.

There are a lot of arguments thrown around about public sector pensions – that they are lavish, ’gold-plated’, or act as compensation for employees who accept lower current wages than would be payable in the private sector. The truth, of course, is a little more complex.

In my own experience I know of people who have left private sector jobs to joint the public sector and who have secured higher pay, better pension entitlement and have to work a lot less for it. There is some evidence to suggest that the pay gap between private and public sector jobs has narrowed considerably over the last ten or so years, with a concurrent fall in public sector productivity. However, I think the worst excesses are mostly confined to management level positions, rather than more junior and frontline positions (nurses, firefighters etc). We should be careful not to assume that all public sector workers have it good.

In the context of a reduced number of current contributors to state pension funds (i.e. a smaller government workforce) as well as the demographic burdens of promises to older generations, it is understandable that the government want to limit the liability to the Treasury (i.e. the ‘unfunded’ bit of current pension payments). However, addressing this issue will be much harder for them than the state pension issue for a number of reasons:

• pensions are contractual entitlements, which would make it hard for the government to change already committed entitlements (which means they are unlikely to reduce current pension costs);
• changing pension benefits for new employees (for example, switching to average salary schemes) would not have a direct benefit to the public finances until those workers retire – possibly several decades;
• trade unions are likely to oppose any material changes to existing workers, and possibly new workers.

Making existing members of pensions schemes increase their payments into the scheme would be challenging, but probably the least worse option. Likewise, it might be possible to reduce the entitlement existing members accrue in future. Both are likely to meet strong opposition.

The tribal response to the appointment of John Hutton to chair a review into into public sector pensions was incredibly disappointing, and trivialises a very serious issue for the UK. It is likely we will need cross-party support for any measures to make public sector pensions affordable. Labour should be at the heart of those debates and contributing to the development of policy on those issues. Far from being deriding him for being a “traitor”, Labour should welcome Hutton’s appointment and make the most of his involvement.

After all, we can’t afford not to.