Government Pensions - A First Step Out Of The Mess
20 Jan 2006
A version of this article by Tom Miers appeared in The Scotsman on 20th January 2006
The row over local government pensions is another skirmish in the spreading conflict on this most difficult of issues.
Public or private, pensions are both complicated and tedious to think about. Many don’t bother to grapple with the intricacies of their own arrangements, so it is no wonder that the details of another story about the looming ‘pensions crisis’ can seem baffling.
So it can be helpful to start off by thinking about pensions in the most basic terms: that they are simply savings policies to provide us with an income in retirement. It is obvious that the more you save, the higher your retirement income should be. If you work longer, therefore, and spend less time in retirement, your pension should be greater.
The looming crisis is being caused by the opposite effect, however: because people are on average living longer, but retiring at the same age, they are not saving enough to pay them as high a pension income as before.
According to the Pensions Policy Institute, the number of people older than the current state pension age is due to grow from 19% of the population now to 26% in 2055, as life expectancy for 65 year olds increases by more than four years.
These simple facts are at the root of all the current arguments about pensions, but the devil is in the detail.
Left to our own devices, we would obviously either work longer in anticipation of living to a ripe old age, or accept a lower pension income. But the problem is that pensions are usually managed collectively to cop with the risks of premature death or extra long life.
And this is where change becomes difficult, particularly when the state is responsible for organising and distributing pensions.
The quarrel between the Executive and local government workers is writ large in the similar debate over the state pension. Government comes under huge political pressure to maintain existing pension arrangements, either for its employees or the general public, despite the increase in life expectancy and the growing financial liability this represents.
To cave in to this pressure can only mean a rise in general taxation, eventually to unsustainable levels, with dire economic consequences. This is bad news for the prospective pensioners themselves, let alone everyone else.
So in this general sense it is encouraging to see the Executive taking steps to increase the age at which government employees receive their tax-funded retirement income.
This is particularly important in Scotland where public sector pay is now outstripping private sector wages even without taking into account the cosy pension arrangements enjoyed by so may in government employment. This trend is sure to be damaging our already sclerotic economy, as talented workers choose unproductive public sector careers over wealth creation.
However, the specifics of this case leave a bad taste in the mouth which means the Executive cannot be absolved from criticism.
It is striking that the Minister is hiding behind EU legislation which apparently makes this change unavoidable. Perhaps he is right, but it would be more edifying to see him defend this policy openly and honestly if he thinks it is right, or fight tooth and nail against it if he believes it to be wrong.
Secondly, whatever their pay and conditions, it is clear that some local government workers chose their career in part because of the pension arrangements on offer. They believe that a contract they entered into with government has been broken.
This issue of government trust, and the tough political battle of changing state pension arrangements, is going to recur repeatedly over the coming decades unless we find a quite different approach.
The interesting fact is that the UK government has already found the answer. In allowing people to opt out of the State Second Pension and invest the savings in a private pension of their choice, government already provides millions with power to make their own retirement arrangements using part of the state pension.
The government and the Scottish Executive should extend this model not only to the rest of the universal state pension, but also to pension arrangements for their employees. Put them in charge of the cash so they can make their own arrangements with private pension providers.
This might not solve the problem of inadequate saving, but it would lead to much more honest politics. The argument would shift away from cushy entitlements and broken promises, and onto the much more open ground of incomes and savings rates.