Thursday, June 30, 2011

Strikes for pensions

Public sector workers in the UK are on strike because their pensions are under threat.

I have to declare an interest in that I have a public sector pension that paid me half my final salary, index linked, as well as 3 times my final salary as a lump sum on retirement at 60. This was an extremely generous scheme, but it was available at a time when private pensions were even more generous and I could have earned three times my public sector salary had I elected to work in the private sector, though with much less security of tenure. When I die my widow will be entitled to half my pension (also index linked)

When I was young the average life expectancy for a man was 68; now it is 78. It is still increasing. I am 68 with a terminal illness.

Times have changed. Currently public sector teachers are entitled to a pension of an average of £24,000 a year, index linked. Assuming the typical teacher starts work at age 23, having obtained a post graduate certificate of education, and then retires at age 60, as all members who joined the teachers’ pension scheme before January, 2007, are entitled to do, that gives a career of 37 years; you would need about £500,000 to buy an index-linked pension of £24,000 in the private sector. Calculations are that public sector employees earning £32,000 a year are retiring with pension pots worth £500,000.

In order to save £500,000 over that length of time, assuming investment returns of 6pc per annum net of charges, you would need to start by setting aside £600 per month from outset, even if contributions rise with earnings during their career.

Assuming initial salary of £25,000 per annum, that level of saving would be equivalent to 29pc of earnings. By contrast, the current teachers’ pension scheme requires members to contribute just 6.4pc of earnings while the Government contributes 14.1pc.

But this is an unfunded scheme. There is no pot of money. Today’s teachers’ contributions and the taxpayers’ subsidy is used to pay pensions to teachers who have already retired, leaving the benefits being accrued by teachers still working today to be funded by teachers and taxpayers of the future.

By contrast, the average lump sum used to buy an annuity by people retiring in the private sector has fallen to £22,000 following recent stock market setbacks, according to the Office for National Statistics. That’s less than one twentieth of the pot enjoyed by our example teacher; even allowing for the fact that there is a wide range of salaries for public sector workers.

It may seem very unfair that the Government is now attempting to water down earlier administrations’ extravagant pension promises. But it will be interesting to see how much public sympathy there is for strikers today. Specifically, how much enthusiasm will there be to go on paying higher taxes to subsidise pensions for the public sector which people in the private sector can never hope to enjoy themselves?

I always say that socialists are very good at spending other people's money until it runs out; then we have a right wing government that takes the blame for public spending cuts. When we replenish the exchequer no doubt another spendthrift left wing administration will be elected.

The Greek problem is mainly caused by successive governments spending more than they earn on pensions and public sector jobs. It is not surprising that there is resistance among those who must work until they are 68 to fund pensions for those who would like to retire to sunny beaches at 57.

1 comment:

George said...

Quote last paragraph: Totally accurate. Plus disproportional pensions paid, plus government corrupted since 1981 when socialists made it as first party in the parliament....