When Edward Heath was held to ransom by the unions in 1974, he called an election with the stirring question, ‘Who governs Britain?’, to which the answer was ‘not you, chum’. It is incredible that after more than 30 years, when so much is meant to have changed, the unions have just rolled over a New Labour government, with disastrous consequences for the public finances.
Over the past year the Trade and Industry Secretary Alan Johnson has made a series of bold interviews and speeches on the need to reform public sector pensions, whose over-generous provisions promise to bankrupt future governments. Mr Johnson’s determination and common sense made him a worthy ‘Minister to Watch’ at last year’s Spectator Parliamentarian of the Year awards. He remains a minister to watch, but now for a slightly different reason: an ability to perform U-turns at a speed of which a joyriding yobbo on a sink estate would be proud.
These are the words of the Trade Secretary, from an interview published at the weekend, still maintaining the need for reform. ‘[The argument for raising the retirement age of public sector workers from 60 to 65] is irrefutable. It is demographic change. We are healthier, living longer. The problem is there are fewer people working, funding more people in retirement. For us to say to the private sector you have to work longer and save more money, and to the public sector you stick with your retirement age is impossible.’
We could not have put the problem better ourselves. Yet here is Mr Johnson again, explaining on The World at One on Tuesday why, after all, he had decided that five million existing public sector workers can stick to retiring at 60. ‘What the unions have said, very forcefully, is that protection for existing staff is a priority …we can meet that. In a proper negotiation you exchange information, you listen to people’s arguments and you come to an agreement.’
We cannot entirely rule out the possibility that in between interviews Mr Johnson was seized, bound and gagged by union leaders. That is certainly what happened metaphorically. The ‘forcefulness’ of the unions’ arguments, to which the Trade Secretary referred, manifested itself not in superior logic but in the threat of a national strike. Faced with the bully boys, the government simply capitulated. The cost of continuing to pay for fit, healthy 60-year-old former civil servants to wile away their hours in the sun will not be greatly noticed in next year’s budget, but over the years it will become a millstone for the taxpayer. To fund the pensions of existing public sector workers will eventually cost the state £700 billion, twice the country’s national debt.
Should life expectancy rise at more than the projected rate, it will be even more. It is impossible to put a figure on the cost because the final salary pensions promised to public sector staff amount to an open-ended commitment which puts the public purse at the mercy of unknowns such as future salary rises, inflation rates and changes in longevity. Forty years ago the Equitable Life made a similar promise to holders of its pensions plans, with disastrous results. The difference in the case of state pensions is that it won’t be public sector pensioners who pay the price; it will be taxpayers.
Alan Johnson explains his U-turn by arguing that the pensions promised to existing public sector workers amount to a contract which cannot reasonably be broken. Yet the government was perfectly happy to change the tax rules on personal pensions: one of Gordon Brown’s first acts as Chancellor in 1997 was to abolish the tax relief on company dividends which holders of personal pensions plans had previously enjoyed. Many state pensioners began paying their national insurance contributions at a time they were told state pensions would increase in line with average earnings, not with inflation as is currently the case; what happened to that promise? Moreover, the government indicated that it would help, but then turned its back on private sector workers who have lost their company pensions after the firms for which they worked went bust. Clearly the government makes a somewhat different standard of promise where public sector unions are involved.
It isn’t just the cost of over-generous public sector pensions which is objectionable; it is the effect on the employment market. Thanks to the largesse of recent years, public sector workers already earn 17 per cent more than their counterparts in the private sector. What existing public sector worker will now dare leave his job to take up employment in the private sector, knowing that he would lose his final salary pension by doing so? In refusing to address pension reform properly, the government has ensured that a generation of time-servers will deprive the economy’s wealth-creating sector of able workers for decades to come.
‘Every time I’ve ever introduced a reform in government I wish in retrospect I had gone further,’ Tony Blair said in his conference speech in Brighton. If that is what he wishes, it is in the same sense that a toothless six-year- old wishes a fairy would bring him a new bike. As long as Labour remains in thrall to its union paymasters, genuine reform of pensions will remain a wide-eyed hope.
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