That public sector pensions timebomb

Everyone knows there is a public sector pensions timebomb. All these highly paid public servants are starting to retire on huge pensions and, if the government doesn’t do something about it soon, the cost of these pensions will become unsustainable and will cripple the public finances.

That’s the received wisdom anyway. Looking at the projections in the Hutton report, though, it seems that the timebomb might not be as timebomby as we thought. Indeed, John Hutton concludes that the cost of public sector pensions will peak somewhere between now and 2012-13. Thereafter, even with the most pessimistic assumptions, the cost as a proportion of GDP will fall.

The two charts below show the cost of public sector pensions as a percentage of GDP. The first chart is based on projections by the Government Actuary’s Department, the second on Office for Budget Responsibility projections but both give a similar picture.

Among other factors, the current public sector pay freeze, higher employee contributions and the shift from RPI to CPI for indexing purposes have already reduced the liabilities. The cost of public sector pensions will rise in real terms but even the UK’s anaemic levels of growth will more than keep pace with it. The peak of the liability is, or soon will be, behind us.

Oddly, not many of the articles I have read over the past few days seem to have picked this up. Only Jeremy Warner in the Telegraph and Patrick Collinson in the Guardian put the so-called pensions timebomb into perspective and neither piece made it into print.

But just because the public sector pensions liability is past, or near, its peak doesn’t mean that we have nothing to worry about. The graphs also show that the cost relative to GDP will not return to pre-recession levels until sometime after 2030. At the same time, at least for the next few years, the public debt and the resulting debt repayments will be rising too. Together with the general increase in public sector costs brought about by an aging population, this will make 1.7 percent of GDP much harder to find than it was when the public finances were in better shape. 

Funding public sector pensions, then, will not be cheap. 1.7 percent of GDP is still a hell of a lot of money – around the same size as the defence budget, according to Jeremy Warner. But the suggestion that the pensions of public servants will bring the country to some kind of financial apocalypse is rubbish. The future liability is nowhere near as spectacular as some would have us believe. It’s more like a slow burning bonfire than a timebomb.

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5 Responses to That public sector pensions timebomb

  1. Pingback: That public sector pensions timebomb - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. You are right that most of the Press ignored the fact that public pensions are not timebomby (tm Rick) and are acting as if something has to be done or else the country will fill into a black hole.

    However, one journo did bring some sanity: the estimable Faisal Islam from Channel 4 News

    http://blogs.channel4.com/faisal-islam-on-economics/public-sector-pension-reform-a-recipe-for-strife/13859

  3. Pingback: There is no crisis « Alternate Seat of TYR

  4. Jesse says:

    Your argument accepts all of the data and graphs as fact. You can’t do that. As a blogger or journalist, it is important for you to understand the data before you talk extensively about it. Can you answer me what assumptions they are using for lifespans? What about their assumptions on GDP growth? Debt obligations and rising interest rates? What about the assumptions for performance of the pension capital?The data that your little charts are based on are riddled with assumptions.
    It would be prudent for you to take a long hard look at all of those assumptions. I would imagine that if you did so, you would find many of them are not realistic. Even if they were realistic, history and events have a way of outpacing our little economic models. All in all, I find your argument to play down the impacts of the pension situation entirely lacking in substance.

  5. Rick says:

    Jesse, of course I don’t accept the data as fact. No-one can accurately predict the future. They are projections – a best guess view with a margin of error. They come from two seperate but reputable sources.

    That said, if you have some information from other sources which shows that they are not realistic projections, I’d be fascinated to see it.

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