Lewis James Brown argues that even modest public sector reform can never be popular and sets out why the deeper reform proposals from Michael Johnson and the Centre for Policy Studies will ultimately be necessary.
It should come as no surprise that the think tank of Margaret Thatcher would take a view that the financial and economic well-being of our country (and therefore in the long-run, of its people) should take precedence over the benefits of some people lucky enough to have experienced them – and unfortunate enough to have to anticipate their loss. The argument advanced earlier this week that Thatcher was committed to public spending does have some validity – but it also has to be remembered that she took tougher action in the 1981 budget than the Coalition would have dared and never wavered from putting the welfare of the UK economy above any social or political causes anyone lobbied her to believe in.
Believing that moral and social causes are advanced more by ensuring profitable economic circumstances for all is a badge that the Centre for Policy Studies continues to be proud to wear, such as in our recent report ‘Escaping the Strait Jacket – ten regulatory reforms for jobs’, in which our author Dominic Raab MP argued that it is necessary to pause the march towards ‘worker’s rights’ and instead favour creating the conditions that will take thousands out of the vicious cycle of unemployment hell.
And so it is that our Research Fellow Michael Johnson has continued his excellent work in exposing the sheer catastrophe of public sector pensions for the UK purse. He has pointed out that they are similar in structure to a Madoff-style pyramid scheme, ‘collapsing under the weight of insufficient contributions, rising longevity (the DWP expects more than ten million people in the UK today to live to see their 100th birthday) and an ageing workforce (i.e. fewer workers to support each pensioner)’.
The raw figures are damning for UK Plc. – this year public sector pensions are expected to exceed contributions paid into the system through the pay-as-you-go (PAYG) basis by £5.8bn. Even if the modest proposals made by former Labour pensions Secretary Lord Hutton, taken on board by the Coalition and the subject of today’s strikes, were to be adopted, the gap would still be £8bn in 2015-16. This shortfall is funded by all taxpayers, and as the TPA show on their website today, this creates an inherent unfairness for the many in the private sector whose pensions will be considerably less generous – should they be lucky enough to have them. The OBR has predicted that doing nothing would see the taxpayer forced to shell out over £11.3bn a year to public sector pensions by five years time.
The clear headed reader, knowing the state of the UK balance sheet in the wider economy, must know that this kind of profligacy is not sustainable as the government tries (and currently fails) to get the deficit under control. Lord Tebbit today asks ‘The Coalition is packed with public relations men. So why haven't they been able to sell pension reform to the British public?’. The simple answer I believe is – there are just some PR wars you cannot win.
As I have found out while conducting my own straw poll/debates on my personal Facebook page (a little hobby which I tend to limit to people who have no interest in politics), the public don’t hear the economic justification, no matter how many times you tell them. They don’t tend to hear the counter-argument either – rising contributions, receiving less, retiring later. Instead all they hear is everyday heroes: Doctors, nurses, teachers, firemen, policemen, refuse collectors. They judge your argument over whether you agree with those who most of us will have some experience of owing so much to, or whether you are arguing against them. And then there are those who understand the economic argument, but choose not to believe in it because of their own, their parent’s, their friend’s loss of promised benefits. It’s a losing battle before you have opened your mouth (especially if you refuse to lead by example).
That doesn’t mean the Coalition should shirk away from the responsibility of reform of public sector pensions, in fact it is vital they backtrack on the concessions made designed to appease the unions and avoid strikes.
As Johnson writes, there would be dire consequences should this appeasement become policy – particularly the call for ‘no more pensions reform for 25 years’. In that time we cannot know how the UK economy will perform or what additional costs may be accrued, locking us in to escalating unaffordable costs.
Instead, they should use today’s strikes and the bitter rhetoric of union leaders seeking to refight their Thatcher-era battles to steel their resolve and push ahead with real reforms that will make a difference to the future of the UK economy.
What then can be done? In ‘The £100 Billion Negotiations’ the first change Johnson recommends is a simple one actually proposed by the Coalition on formation – increase the basic state pension to £140 a week for everyone. In doing so, the government would address concerns about pensioner poverty and lay the basic framework that would involve first the NEST scheme and move towards a notional defined contributions-based (DC) pension along the lines of those seen in Sweden. Individuals would have a notional account detailing how much they (and their employers) have paid in, while the Treasury would continue to receive the cash to be paid to current retirees.
To achieve these steps, it would have to be made clear that all public sector employers would need to be pensions self-sufficient in a decade time-frame, coinciding with the introduction of the notional DC schemes. After this, cash flow shortages would have to be met by the employers. In the meantime, taxpayers’ contributions would be capped at 65% of pensions in payment.
It is clearly a long and painful road to necessary public sector pension reform, but this is one that the government cannot afford to be ‘off target’ on, or come back with ‘revised calculations’; either for the sake of our economy or those future generations moving into their older season, still wishing to enjoy their own ‘autumn statement'.