Lawrence Kay

The promise of a lifetime

The promise of a lifetime
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It is easy to lose money down the back of the sofa, less so to lose a debt.  The Treasury has long tried to hide the value of the pension promises made to public sector workers. Now, though, the present administration or its successor must start to be honest about the true size of the liability which our report today reveals, because, at £1.1 trillion (or 78% of GDP), it is now bigger than the national debt (which stands at £750 billion).

It has got this big for several reasons. First, when the government receives contributions from public sector workers for their pension schemes, it spends the money on schools, hospitals and suchlike. Second, even though it does this, the Government still needs to borrow money to pay for all the promises it has made. But when it borrows this money and comes to pay the interest on it, it rolls the interest payments into the total liability. The £45.2 billion annual cost of this borrowing, which is equivalent to having 1.3 million people employed on a teacher's salary or a doubling of the defence budget, is thus a debt-on-debt payment. Third, the Treasury pays far more money in to the pensions of its employees than even they know about.

Over the past few years earnings for men in the public sector have risen by 3.7% above inflation. Because so many public sector employees are on defined benefit pension schemes, this has the effect of vastly inflating the final salary on which their pension payments are calculated (particularly for workers who get promoted quickly). It is now possible for a government employee to receive a higher annual pension income than the average wage received across a career.

But, even though the Government spends the pension contributions made by its employees, it does not even ask them for the right amount in the first place. The Treasury gets an average of 6% of pay from public sector workers, and an extra 14% from the departments or agencies they work for. But for a typical employee who stays in his job for 40 years, it actually needs 48% of pay in each and every year of his tenure. The taxpayer meets the 28% shortfall.

Just last year the government made pension promises to public sector workers worth £34.1 billion, but only received £19 billion in contributions from employees and their employers (of which it has to pay £13.2 billion as the ultimate employer anyway). The £15.1 billion shortfall is made up from other general financing. Each of the five million public sector workers thus receives a subsidy of about £5,700 on top of annual pay (which is already higher than in the private sector at all levels bar the very top ones).

The public sector pension liability is now so big that the Government must start to be honest about what it intends to do about the looming bill. This does not mean that it should renege on any promises it has already made - such a decision would be manifestly unjust - but that it must treat the liability like any other pile of debt. Management of the public finances via sofa government really is not good enough.

Lawrence Kay is a research fellow in Policy Exchange's Economics Unit.