Public sector pensions – sooner or later the axe will fall

After yesterday’s industrial action, and the arguments about pensions, bloggers and journalists have been digging out John Hutton’s report from earlier this year. This chart seems to have come into its own at last, after passing almost without comment when the report was published.

As I said at the time, it shows that the public sector pensions timebomb might not be as timebomby as we thought, given that the cost relative to GDP will peak sometime in the next couple of years.

These figures have been quoted in a number of posts and articles over the last couple of days which have disputed the government’s claim that public sector pensions are unaffordable. Evan Davis used them to demolish Francis Maude’s arguments on Radio 4 yesterday. (Listen to the interview. I didn’t realise a discussion about pensions could be so entertaining.)

But, while the projections in the Hutton report clearly refute the claim that we are facing an imminent crisis, many of those using them to bash the government have only focused on the peak in the graph. The tail tells us something too. Yes, the cost will reduce as a proportion of GDP (at least, it will if we get any economic growth) but even under the most optimistic forecast, it will not return to pre-recession levels until sometime after 2030. Public sector pension costs will therefore be higher than in recent years for at least the next two decades.

Public servants’ pensions may only cost 1.6 – 1.8 percent of GDP over the next couple of decades but, by the 2020s, climate change and other pressures are expected to add around 6 percent of GDP to the public spending bill. Unless taxes rise significantly, there will be a lot of competing claims on an increasingly over-stretched public sector. 1.6 percent will be a lot harder to find in 2029 than it was in 2009. As Frances Coppola puts it, it’s not a question of whether public sector pensions are affordable (they clearly are) but of what our priorities will be over the next twenty years. If we decide it’s OK to spend 1.8 percent of GDP on public sector pensions, what will we stop paying for instead?

As pressure on public spending rises, governments will seek to cut costs wherever they can. Even if the Coalition backs down (which is unlikely) a future administration, of whatever colour, will have to tackle the rising cost of welfare and services – and that will inevitably include public servants’ pensions.

Public sector pensions are not going to bankrupt the country, as some politicians and commentators have claimed, but that doesn’t mean that they are going to be cheap. As John Hutton said, left as it is, the current system carries a financial risk which is outside the government’s control. It is a risk that a low growth economy, with ever-increasing pressure on the public purse, cannot afford to take.

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3 Responses to Public sector pensions – sooner or later the axe will fall

  1. Pingback: Public sector pensions – sooner or later the axe will fall - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Colin Talbot says:

    One issue that I have not seen mentioned is simply this: if we have an increasingly large segment of the population dependent on pension incomes (both public and private sectors), and that income is steadily eroded, what is the economic impact? I assume it will act like a giant sheet anchor on the economy, slowing trend growth as a large, poor, group spends less and less? Or am I missing something? Is this being factored into these various estimates?

  3. Rick says:

    A good question, Colin.

    I don’t have any figures to hand but the ‘grey pound’ must be keeping a lot of businesses going. Fewer grey pounds means that some of this business wil disappear. That’s one of the reasons why the government wants people to work longer. Not only do they cost less if they retire later, they will keep spending for longer. That said, even those who carry on working into their late 60s will probably save a lot of their cash because they know their pensions will be worth sod all.

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