Thursday, 30 June 2011

Asking the wrong question

Today on BBC Radio 4, Francis Maude made the mistake of discussing the "affordability" of public sector pensions with the formidable Mark Serwotka. He lost the argument - massively - and various left-wing publications have been making political capital out of it ever since.

He should never have got into the argument at all.  Of course public sector pensions are affordable. Any public sector expenditure of any kind is always affordable in a sovereign country that issues its own currency and its own debt, and whose debt and currency are freely traded on international markets (pace the Modern Monetary Theory folk, I'm not going down the "debt is an illusion" route in this post!). 

The question should be, of course - do we WANT to spend the amount on public sector pensions that will be required to maintain them in their present form?

Public sector workers say "of course we do".  Generous pensions are a part of their pay package. They are being asked to take a pay cut, in effect.
On the other side of the argument, thousands of private sector workers, who either have no company pension or whose company pension is nowhere near as generous as public sector pensions, think it's unfair that public sector workers should receive better pensions than they do.  They think the money could be better spent on other things, such as uprating general pension provision for the elderly.

Public sector workers argue that their pensions are paid for through their contributions, not from general taxation, so this is an unfair comparison. I disagree. Every penny a public sector worker receives in pay - including pension contributions made both by themselves and their employers - comes from general taxation. Public sector workers are net beneficiaries of taxation in financial terms. Their pension contributions are paid out of general taxation.  Furthermore, as their pension funds are "unfunded" (i.e. current contributions go to pay current pensions rather than being invested for future pension payouts), in practice their actual pensions are also paid out of general taxation.  So to ask whether maintaining the existing defined-benefit schemes is a good use of public money is a perfectly reasonable question.

I don't buy the argument that someone put forward on BBC Breakfast this morning that because the private sector benefits from public sector functions such as education, therefore the private sector should fund better pensions for public sector workers than they provide for their own workforce.  Education is paid for out of general taxation. In other words, the private sector already pays the wages of teachers as well as the private sector workforce.  It is hard to justify the private sector providing better pensions for one set of workers over others purely because the first set are nominally employed by the state.

Of course, the private sector does provide better pensions for some people over others - notably corporate elites. It does so because it considers the work they do to be of greater value than that done by others.  I'm not going to argue here whether corporate executives really justify their gold-plated pensions, but the "work value" argument is the one that is used in both private and public sectors to justify high pay and benefits.  It comes down therefore, once again, to the value that we place on public sector work. Do we consider the work that public sector workers do to be of greater value than that done by private sector workers?  Is the work that I do, as a freelance peripatetic singing teacher, worth less to society than the work done by my state-employed classroom colleagues? Or is it equally valuable, but remunerated less simply because it is in the private sector? And is that because the private sector underpays or the public sector overpays?

In the end these comparisons of private and public sector remuneration are as irrelevant as the affordability question.  The real issue is the priorities given to different calls on public money, and the role of government in ensuring the welfare of its people. Is the remuneration of public sector workers, provision of adequate state pension provision, and protection of private sector workers from exploitation, of lower priority than paying the IMF to bail out yet more banks, fighting wars in Libya and Afghanistan, or hosting the Olympics (hat-tip to my brother Matthew Cooke for some of these questions)? Government can always find money to do whatever it wants to do. But the twin smokescreens of "affordability" and "unfairness" mean that people end up fighting with each other rather than holding government to account for its decisions.

11 comments:

  1. Governments, sadly, are only held account when they cock it up so badly even the dead vote. Francis Maude should be held account every time he takes a breath.

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  2. !Pedantry Alert!

    "Every penny a public sector worker receives in pay - including pension contributions made both by themselves and their employers - comes from general taxation."

    Since you've mentioned MMT (great to hear more and more people talking about it, BTW), I feel I should point out the flaw in this statement. MMT shows that not a penny of public spending comes from taxation of any form - taxes are not collected somewhere and then spent, they're simply destroyed. Spending is an operationally separate process from taxation. Moreover, public spending necessarily must occur *before* taxation, since it provides the currency required by the private sector to extinguish tax liabilities. Furthermore, spending on pensions ultimately provides income to private firms as well - after all, where do all those pensioners go to spend their "generous" pension money anyway?

    (Pedantry over)

    "It is hard to justify the private sector providing better pensions for one set of workers over others purely because the first set are nominally employed by the state."

    Agreed. Private sector workers should receive pensions just as good as those given to public sector workers, because it's the 21st century ferchrissakes, and we have more than sufficient productive capacity to supply everyone with a good standard of living when they retire after a life of hard work. Pensions (and almost everything else besides) could be "funded" by taxing unearned forms of income like land rent and interest. Since these forms of income are not generated productively - they are essentially zero sum transfer payments from labour and industry to finance and real estate - they simply act as a handbrake on the economy anyway. Taxing them away would lower the costs of both living and doing business (and pension costs, etc.) and our economy would be more competitive as a result.

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  3. Rather than making a general point, I prefer to speak of my own experience. I went into the Civil Service after many long and hard years' education at considerable personal debt. The remuneration I would command at the OFT was much smaller than the private sector. As a matter of fact, I was head-hunted several times while working there and offered on one occasion more than twice what I was making. For me, there were three primary reasons for joining the civil service (and staying there):

    1. I felt noble knowing that I was fighting for what I saw as "the right side".
    2. Job Security.
    3. Better pension provision.

    Factors 2 and 3 have been under massive attack for the last decade. Factor 1 is not enough on its own to entice top talent. The implications are huge.

    Take the OFT example - if they are unable to attract decent candidates they will be completely at the mercy of large firms (who have three times their resources anyway). In the case of mergers and competition cases the consequences for the economy can be disastrous.

    While I agree with your basic thesis that this is the assessment which needs to be made for the future, I don't think it applies to the now. The population curve and increased longevity are not a surprise - they have been accurately predicted for many decades.

    The government chose to enter into contracts with public sector workers, knowing these trends, in order to entice them from a much more lucrative private sector career. Those workers now wish to hold them to that contract. And unless the government can invent a time-machine and offer them back the last 10, 20 or 30 years so that they can make different choices, they have to cough up.

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  4. Surely you need to see pensions as part of the overall pay package? Part of our approach to public sector pay has been: if you work in the public sector, you get much lower pay than your private sector counterparts but you have greater security of employment and a better pension. This may not have been true of all comparable posts across the two sectors, but there is surely an element of truth in it? In any event, I do think that if anyone who wants to paint public sector workers as living on the fat of the land needs to compare their total remuneration package across all aspects with what someone doing a comparable job in the private sector will get. And of course there will be an element of subjectivity in terms of assessing whether and how much more secure the public sector workers are and how much value should be attributed to that security. But at least doing that tries to approach fairly the question of whether the public sector is doing disproportionately well in difficult times.

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  5. Frank, I did compare a public and private sector worker doing similar jobs. The private sector worker was considerably worse off and moreover was funding the more generous provision of the public sector worker. That is why so many are angry. The strike yesterday focused the anger of the public sector. But the private sector is equally angry. I feel angry, actually - after all, I am a teacher too, but I don't get anything like the pay and benefits of a similarly experienced teacher in the public sector - but I decided to turn my anger to what I consider the real issue.

    I feel sad that you completely missed my main point, which was that comparing public and private sector remuneration is a smokescreen. The real issue is the priorities that the government gives to spending programmes. When we argue and fight among ourselves because "it's not fair" we don't address the issue, which is the failure of successive governments to recognise that the welfare of people is its first priority.

    I don't think pensions should be "earned". I believe everyone has the right to a decent pension whatever job they have done (or not done - the poorest elderly are women who have not been in employment due to domestic responsibility). Because we don't have decent state pension provision, we are fighting over scraps. Let's stop arguing about workplace pensions and demand decent state provision.

    Alex, thank you for recognising the issue. But companies can of course change their employees' terms and conditions - including their pension provision. The public sector is no exception, so to say the government "must cough up" is incorrect. However, they have to get agreement and at present that agreement does not seem to be forthcoming.

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  6. I did compare a public and private sector worker doing similar jobs.

    Yes, but that was 'worker' in the singular. Your position isn't necessarily typical. Touchstone - the TUC blog - has a series of posts which are relevant here; basically the evidence suggests:
    1. The public sector comprises proportionally far more white collar/better qualified workers,partly becasue a lot of the manual jobs have been privatised out of it.

    2. The public sector has fairer pay structures. The gap between top and bottom and between men and women is smaller in the public sector than the private sector. People with a higher education get paid less in the public sector.

    3. Touchstone also makes the point that,

    "In the public sector even the low paid get pensions. In the private sector, the minority who get a pension are much more likely to be well-paid so you end up comparing a public group that include a lot of low paid staff with a private sector one that excludes the vast bulk of the low paid."

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  7. I've read the Touchstone blog. The example I gave, which was of two highly-qualified and experienced teachers, is not mentioned by them at all, but is relevant here. The worker in question is far from being an isolated example. There are thousands of peripatetic teachers. We work in schools, but are not employed by them so do not benefit from the pay and perks of classroom teachers, even though we are equally qualified and experienced. There is massive "shadow employment" in the public sector - people who do public sector jobs for private sector wages because they are technically not "employed" by the state. They are usually self-employed, so receive few if any benefits. Few people talk about this, and Touchstone ignores it completely.

    I still find it sad that you would rather talk about the smokescreen than the real issue. When can we have a conversation about the failure of successive governments to prioritise spending decisions in the best interests of the people of this country?

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  8. Frances,
    It won't do to assert that public sector workers have an advantage but then say 'but let's ignore that and talk about the national good': first the canard must be nailed.

    I understand your concept of 'shadow employment' in the public sector: it fits my personal situation. But it is wrong to suggest that everyone in this circumstance is worse off than their properly public sector employed colleagues. What's often been transferred is risk - the self employed person may often (not always) get a higher daily rate but have no cover for things like sick pay or pension and, obviously, no guarantee of secure employment either.

    I agree with your definition of the 'national good' when you say that everyone deserves a good pension. I'm just not totally convinced it should be the state alone that provides (not that the state does at the moment); there should be an employers contribution to the necessary funds. & herein lies the rub - it is the private sector employers who have failed on this front just as much as government.

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  9. I don't know any peripatetic teacher who gets a higher rate than a classroom teacher of similar qualifications and experience. Mostly it is less, because parents have to pay from discretionary income and schools have tight budgets and no commitment to non-employed staff. Many peris are women working part-time because the hours can be organised round their kids. And like a lot of part-time women workers they get ripped off, frankly. The public sector is as guilty of ripping these people off as the private sector, so for Touchstone to claim that public sector pay is "fairer" is not strictly true - it only applies to people employed by the public sector, not to everyone working in the public sector. Public sector shadow employment is a national disgrace in my opinion.

    I don't think employers should contribute to pensions, actually. Many people are not employed or are self-employed - what about them?

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  10. Frances - I used to work in the public sector and my job involved a fair amount of working with people in the private sector. During that period of my career I would imagine that every private sector person I had work dealings with was earning at least twice my salary and probably quite often more than that. Fair enough, I chose my job and they chose theirs! If I had stayed in my public sector job (which I did not!) I would eventually have had a reasonable pension I imagine but I have no doubt that I would have been financially far worst off than all my private sector counterparts both during my working life and in retirement. It certainly would have added insult to injury if those people had then turned round to me and said: "but at least we earned our pensions, unlike you!". But of course they would have been plenty of hard-working, well-qualified and talent people in both the public and the private sectors who would have been even worse off than me including no doubt peripatetic singing teachers :-)

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  11. Excellent post. Over two years ago my company stopped its contribution into my pension fund; it was supposed to be temporary yet contributions have still not returned to their original level. I'd like to see at least a token response from the public sector in acknowledgement that as a result I (as a taxpayer) can't "afford" (for want of a better word!) to pay for such generous pensions. And this has nothing to do with a judgement of worth or who's better than whom.

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