Why don’t pension critics attack the fat-cats?


2:44 pm - September 9th 2009

by Nigel Stanley    


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The attack on public sector pensions by the TaxPayers Alliance, right-wing newspapers and the more excitable employer organisations is the kind of campaign used by the shrink-the-state US right.

There’s a very clear narrative – public sector pensions are unaffordable, unreformed, out-of-control and provide fat cat pensions. Its aim is to divide less well off people and make them vote for the interests of the rich.

Yet its evidence base continually shifts, with outrageous misrepresentation of statistics and deliberate bending of the truth in an admittedly complex area that very few people understand. The result is that even progressive people accept there is some big problem with public sector pensions that needs resolving.

Today the TUC publishes the first comprehensive rebuttal of the arguments used against public sector pensions and instead shows that for every pound that taxpayers spend on public sector pensions this year, they are giving £2:50 to subsidise the pensions of the richest one per cent who earn more than £150,000.

It attacks public sector pension critics who present estimates of the future cost of unfunded public pensions over decades as if they were a bill that has to be paid within 28 days, rather than a continuing and affordable part of public spending.

Nor are there public sector pensions that deserve the fat cat label. In private sector boardrooms, directors are commonly in gold-plated pensions with higher contributions than their staff. In the public sector the chief constable is in the same scheme as the constable – and indeed in health and local government better paid staff put a higher proportion of their pay into their pension than lower paid staff.

While there has been a growth in the (still small) numbers of public sector chiefs with big pay, this still pales into insignificance besides the private sector. Reduce differentials if you will, but the issue here is pay inequality not unfair pensions.

Pension payments can go a long way into the future. The last veteran to receive a US Civil War pension died in 1956. But a handful of widows – who married elderly veterans when young – lived into this century and continued to receive pensions until they died.

It would have been absurd to present the cost of all those future pensions as a share of the USA’s 1865 GDP, the key question is whether the state in future years can meet the likely payments needed to honour peoples’ pension promises. It can. For sure there is some increase as the population ages, but not as much as that required by future state pension bills. And it settles down at a steady level – at less than 2 per cent of GDP – by 2027 according to the Treasury.

The real pensions story is the decline in private sector pensions. Yes, it is unfair that public sector staff get better pensions than those in the private sector. But the solution is not equality of misery, but decent pensions for all.

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About the author
Nigel Stanley is an occasional contributor to Liberal Conspiracy. He is the TUC’s Head of Campaigns and Communications. He's also at the ToUCstone blog.
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Story Filed Under: Blog ,Economy ,Equality

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Reader comments


Unfortunately the comments by Ros Altmann and John Ralfe in the Guardian
rather contradict your assertions.

“Ros Altmann, an independent pension adviser who helped set up a rescue scheme for workers in crashed companies, said unions needed to recognise that final salary schemes were unaffordable in the private or the public sector.

She likened the unfunded schemes covering teachers and nurses to a “Ponzi scheme” that depends on contributions from existing staff to fund pension payments. In this way, she said, current workers were making an unaffordable promise to themselves that younger workers must pay extra taxes at a later date.

“It’s not very different to a Ponzi scheme and is just as unsustainable,” she said. “There is no reason to believe that the huge rise in costs in the private sector following a more realistic view of the situation is not just as relevant in the public sector.”

Independent expert John Ralfe has calculated that the annual bill of £15bn is half the true cost of providing public sector pensions. He argued that Treasury projections underestimated the costs of unfunded schemes as a wave of better paid staff entered the last 20 years of their working life expecting pensions worth two thirds of their salary.

In a recent report, he said: “Public sector bodies cannot be run efficiently if a major part of their costs are conveniently understated. The real pension benefit for NHS employees and teachers is 28% of salary, double the official 14%, for Civil Servants it is 33%, versus the official 19%. The average public sector worker is 20% better off than a private sector worker on the same salary, with an 8% employer payment to a defined contribution pension.””

http://www.guardian.co.uk/business/2009/sep/09/tuc-pensions-tax-relief

But the solution is not equality of misery, but decent pensions for all.

A great slogan, but this cannot be magicked out of thin air.
We all will have to save/contribute far more, as is absolutely clear from Ralfe’s calculations – even assuming no further increas in longevity!

2. Dick the Prick

‘Its aim is to divide less well off people and make them vote for the interests of the rich’ – geez, that’s cynical. I think it might have something to do with Brown robbing £5 billion a year from them too.

We definately can’t sustain these pensions so just eliminate final salary schemes for anyone 50 or below – job done – next

Back when I worked for TFL a newsletter went round on the pension scheme. In it, one of the trustees? had a short article, in which he congratulated TFL in increasing staff numbers.

Why would someone in pensions congratulate management for increasing staff levels? Well apparently the scheme needs more contributors to fund payments. I’m no pension expert, but there’s something not right there.

“While there has been a growth in the (still small) numbers of public sector chiefs with big pay”. Pull the other one.

Today the TUC publishes the first comprehensive rebuttal of the arguments used against public sector pensions and instead shows that for every pound that taxpayers spend on public sector pensions this year, they are giving £2:50 to subsidise the pensions of the richest one per cent who earn more than £150,000.

Presumably the whole of the TUC’s argument dishonestly trades on the crucial ambiguity between the sense in which people are “giving” (read: being forced to pay through taxation regardless of whether they consent) money to public sector pensions, and the sense in which people are giving (read: engaging in voluntary and mutually beneficial transactions) money to subsidize the pensions of the richest one percent. Without this equivocation, I don’t see any argument there at all.

“(still small)” – this was the bit I was referring to

I would of course take issue with both the critiques offered in the Guardian. You can only view public sector pensions as a Ponzi scheme if you think that the state and taxation won’t continue. This may be the dream of many libertarian public sector pension opponents but ain’t true. (I’ve written more on this today at the TUC Touchstone blog http://www.touchstoneblog.org.uk/2009/09/decent-pensions-for-all/

John Ralfe’s arguments are more serious. There is genuine disagreement about how you measure today commitments to pay pensions in the future.

But the Pensions Policy Institute is independent and well-respected by all sides in the pensions debate. They say that the value of a public sector pension typically adds 21 per cent to the real salary of a public service worker – (though that doesn’t take into account the employee contribution.) Public sector employers do take account of their contributions when planning expenditure – and Ralfe is right out at one end of the debate with his figures.

But of course any worker with a pension is better off than a worker without a pension on the same salary. Ralfe’s typical private sector worker with an 8 per cent contribution is a bit of a fiction. The typical private sector worker – ie more than 60 per cent – doesn’t have any pension. That’s the scandal.

And of course that will require us to save more. The TUC has traditionally backed compulsory employer and employee contributions, and at least from 2012 staff will be autoenrolled in pension schemes though with the right to optout.

But it is a valid question that the predictable right-wing critics are not answering – why are the likes of the TPA only attacking public sector pensions and not the fat-cats who get subsidised even more?

“But it is a valid question that the predictable right-wing critics are not answering – why are the likes of the TPA only attacking public sector pensions and not the fat-cats who get subsidised even more?”

1. Taxation is theft
2. Hedge Fund Managers have earned their right to have multi-million pound pensions, someone who has spent their lifetime teaching/nursing/policing has not earned the right to anything
3. Its intefering with the market, and BAD THINGS happen when you interfere with the market.
4. The TPA are quite comfortable in their non-jobs, and need the fatcats in question to throw them some more money (and, I speculate, a cushy pension deal)

I doubt you will get an answer, and if you do that it will be based on these points. Well, maybe not the last one.

Can someone explain how the government is “subsiding” the pensions of those earning over £150,000? It would be absolutely wrong to tax pension contributions as income tax because you do not get the money as income, and anyway if your pension is large enough when you retire you do pay income tax when you receive the money.

Sorry, but I have absolutely no problem with the richest not paying tax on their pension contributions because it also means that my much more modest scheme does not get wiped out by tax as well. If it looks like income then tax it as income. Pension contributions do not look like income.

(if anyone is interested the pamphlet can be downloaded from here – http://www.tuc.org.uk/extras/decentpensionsforall.pdf )

I have to say my favourite line from the website is this – “Tax relief is heavily skewed towards the better off”. Well gee, you think. The people who pay the most tax see the most benefit when relief is given – shock horror.

As I normally post comments criticisiing people on this site, I will take the oppertunity to agree with something. Whoever said that the private sector should have compulsary pensions that can be opted out of is 100% right. I imagine it will probably happen at some point.

NB: I still don’t quite get how the general public “subsidise” the private sector pensions of the rich. More detail on that one would be nice.

“Today the TUC publishes the first comprehensive rebuttal of the arguments used against public sector pensions and instead shows that for every pound that taxpayers spend on public sector pensions this year, they are giving £2:50 to subsidise the pensions of the richest one per cent who earn more than £150,000.”

Ah, well, but, you see, that’s not exactly what the TUC is in fact saying.

“The cost of providing tax relief on pensions in 2007/8 was £37.6 billion according to HMRC figures – ten times the net cost of unfunded public sector pension schemes that are not backed by an investment fund. This is estimated by the Treasury to be £4 billion this year.”

They’ve neatly sidestepped the issue of how much is being spent in employer contributions (ie, taxpayer’s money) on public sector pensions which are backed by an investment fund. Further, by making this distinction they’ve neatly sidestepped the issue of whether any of those fnd backed pension are in fact short of a bit of cash in the future with which to pay the pensions promised….and I’d be amazed if there were none in deficit.

Their actual statement is “tax relief on top peeps pensions is 10 billion. We only spend 4 billion a year on pensions now for public sector workers who did not (the past tense is very important here) pay their pension contributions into an investment fund”

As I say, leaving out the amount of taxpayer’s money which *is* paid into such funds and is of course a taxpayer subsidy to a future pension: and also leaving out the amount by which said “funded” pensions are underfunded.

So I’ll call bullshit on that figure then.

And also as Mark at #10 says. Being able to defer taxation is not the same as not having to pay taxation at all: and defering tax is definitely not the same (at least in amount) as being subsidised from taxation. Even at worst the subsidy is the time value of money over the period of deferment.

So bullshit I’m afraid. Wouldn’t be surprised to find Richard Murphy had something to do with it.

I find the seething jealousy of rightwingers concerning public sector pensions absolutely fascinating.

Whilst I accept that overall the liabilities are stacking up, the idea that ordniary public sector workers are certain to be living off fantastical pensions in their retirement is laughable – and typical of the kind of blinkered rightwing hysteria on certain issues that is getting so tiresome.

Not so long ago these rightwingers were crowing about how glorious the British pension system was, forgetting that contemporary British pensioners were, on average, the worst off in Western Europe thanks to Margaret Thatcher’s myopia in cutting the link in rises in earnings and rises in the state pension.

Rightwingers also neglected to review actuarial assumptions on human longevity and ignored the fatal weakness of almost wholly relying on a volatile stock market to build up a fund – both factors which have ripped the bottom out of the British solution.

So, Righties, in their desperation to save face, hypocritcally try to divert attention on public servants’ pension provision instead.

Utterly shameful (although that end of the political spectrum knows no shame).

“Why don’t pension critics attack the fat-cats?”

Because most of the right wing critics like the tax payers bullshit group are funded by the said fat cats.

I find it amusing that, normally, when the left talks of raising taxes the Right whine about this being “levelling people down”. Whereas, when it comes to pensions, they are happy to level down provision!

Here is how taxpayers are subsidising fat-cat pensions:

Taxpayers are paying £2.50 for subsidising the pensions of the richest one per cent of the population for every pound spent on paying pensions to retired public servants such as nurses, teachers and civil servants, according to new research published today (Wednesday) by the TUC.

The findings are revealed in a new campaign pamphlet Decent Pensions for all that says the real pension problem in the UK is not the affordable cost of public sector pensions, but the growth in the number of private sector employees with no pension.

The cost of providing tax relief on pensions in 2007/8 was £37.6 billion according to HMRC figures – ten times the net cost of unfunded public sector pension schemes that are not backed by an investment fund. This is estimated by the Treasury to be £4 billion this year.

http://www.tuc.org.uk/pensions/tuc-16929-f0.cfm

Now I’m going to wait for the TPA shriek of outrage…. anytime now…

“Further, by making this distinction they’ve neatly sidestepped the issue of whether any of those fnd backed pension are in fact short of a bit of cash in the future with which to pay the pensions promised….and I’d be amazed if there were none in deficit.”

It doesn’t really matter that much whether the local government scheme (or any funded DB scheme for that matter) is in deficit in the short term if its payments out are offset by contributions in (you obviously don’t cash in the fund’s assets to pay out pensions if the scheme is ongoing), and there’s a reasonable plan in place to return to full funding. Usually deficit correction/recovery plans are based on typical member time from retirement. Last time I looked at this I think the average recovery plan was about 9-years, but average age to retirement in the LGPS may well be lower so actuaries might be willing to go higher on the correction period.

It would only really start to matter if someone wanted to wind up the scheme up…

“average age to retirement in the LGPS may well be lower”

mean higher obviously

[17] Sunny

I sense an argument about definitions coming on.

Personally I don’t think that tax relief on pension contributions should be classed as relief, for the simple reason that pensions contributions aren’t income. You can’t touch that money until you buy your annuity, at which point if you get enough from your annuity payments you will pay income tax on that. Others may disagree with that view.

As a private sector employee paying these pre-tax contributions I do have a vested interest in the argument, but it seems terribly unfair to start taxing contributions while the public sector enjoys the perks of final salary schemes.

Sunny,

Are you seriously saying that you don’t understand the difference between a) taxing one person in order to give their money to someone else and b) taxing someone less? And are you seriously saying that you don’t understand how an organization dedicated to promoting the interests of taxpayers can perfectly coherently and consistently oppose the former but not the latter?

The private sector has most of the perks. bonuses, commissions, company cars, private medical insurance, the public sector has pensions. So it is no surprise the brownshirts want to destroy that.

They hate the public sector. and will not rest until they have destroyed it.

@21

Do you think that Working Families Tax Credits are:

a) Expenditure by the state that should be recognised as such and is ripe for cutting under a new administration

b) Paying less tax so a great idea and something to be protected under a Conservative administration worthy of the name at all costs

[23] They’re a funny one and I have to admit I don’t know enough about WFTCs to judge, but on workingfamilies.org.uk (an organisation that “helps children, working parents and carers and their employers find a better balance between responsibilities at home and work”) they have a WFTC calculator that, in their words, “is to provide an estimate so you can work out what pattern of working would be financially best for you”.

Call me old-fashioned, but surely ‘as much work as possible’ should be financially best for them, and any system in which people are not better off for taking more work is inherently flawed. I’m not saying they HAVE to work that bit extra, but I know many families who put in as many extra hours as they can, at whatever time they can get work for, in order to get as much money as possible. It should be up to the family to decide the balance of hours worked/family time, safe in the knowledge that more work=more money.

Just because the fatcats are in the wrong doesnt mean that the public sector pensions are a good thing. The taxpayer is getting ripped off by both sides.

The answer seems is that everyone should work for the state and be entitled to an index linked pension. After all the communists are so good at organising factories to produce goods people want to buy. The Trabant was such a popular car in W Germany !

@25

“They have a WFTC calculator that, in their words, “is to provide an estimate so you can work out what pattern of working would be financially best for you”.
Call me old-fashioned, but surely ‘as much work as possible’ should be financially best for them, and any system in which people are not better off for taking more work is inherently flawed.”

I think the answer is usually “more work than you are doing at the moment” and your judgement would be correct and what is recommended, with the calculator trying to prove to potential workers that this is the case by showing the impact on benefits. A key intention of the WFTC is to reduce the marginal tax/benefit withdrawal rate to a level that makes work pay, though various “passport” benefits-in-kind (free school meals, free prescriptions, free dental care etc) and the need for e.g. single mothers to pay for child care, particularly if they work full-time, complicate things somewhat.

There’s also an argument that for many people on WFTC it is not socially optimal to work full-time due to the potential impact on their children. The Conservatives agree with this in the case of a married couple (they want to enable a woman in a marriage to stay at home with a child by providing a new tax break, or – if I’m being cynical – siphon off money from the poor to the rich) but not in the case of a single mother.

It has been a longstanding principle of UK pensions planning for years that pensions are regarded as deferred pay. As the eventual pension will be taxed as income on receipt, it has always been considered perfectly fair to grant full tax relief on an individual’s contributions to pension schemes. If – as the TUC seem to be proposing – pension contributions have to be paid out of taxed income (e.g. at 40% or 50%), and then some years later the pension derived from such contributions is taxed at say, 40% or even 50%, then the individual has effectively been taxed twice-over on the same monies!

So Mark M is quite correct in challenging the irresponsible claim that high earners, by enjoying full tax relief on their contributions, are somehow being subsidised. They are not. They are simply deferring their liability to income tax until they come to pick up their pension in retirement.

Do not forget that the proposed measures that arose out of the 2009 Finance Act aim not only to restrict tax relief on a high earner’s personal contributions to a pension scheme, but to impose hefty Benefit in Kind tax charges on the value of the employer’s contributions as well.

It is highly disingenuous for the TUC, in its next breath, to lament the decline of private sector pension schemes. Just what does it imagine will happen when the senior directors of good occupational pension schemes no longer find it tax-effective for themselves to remain in those schemes? If the senior directors opt out (and frankly who could blame them) of such schemes, then there will be even less incentive for the sponsoring employers to keep such schemes going.

Unfortunately, this type of bash the rich mentality will only hasten the decline of good private sector schemes.

Unfortunately, this type of bash the rich mentality will only hasten the decline of good private sector schemes.

Hang on. Did I dream all those stories about “good provate sector schemes” being closed to new (and now, increasingly, existing) members?

And didn’t all those begin happening after the last financial crash following the ludicrous dotcom boom?

BenM – No, you didn’t dream it. The fact is that final salary schemes have been closing down for a number of years – my point being that the TUC’s proposals will only hasten this trend, in respect of those private sector schemes which are still left.

Thanks for (nearly all) the comments on my post. It’s been a good debate.

As I want to respond at some length – particularly to Mac 3 – I’ve put a further post on the TUC’s blog:

http://www.touchstoneblog.org.uk/2009/09/pensions-tax-relief/


Reactions: Twitter, blogs
  1. John

    RT @libcon Liberal Conspiracy » Why don’t pension critics attack the fat-cats? http://bit.ly/QtPQT

  2. Nigel Stanley

    Has written about the TUC’s new pensions report @touchstoneblog http://snipurl.com/rphf2 and @iibcon http://bit.ly/QtPQT

  3. John

    RT @libcon Liberal Conspiracy » Why don’t pension critics attack the fat-cats? http://bit.ly/QtPQT

  4. Tweets that mention Liberal Conspiracy » Why don’t pension critics attack the fat-cats? -- Topsy.com

    […] This post was mentioned on Twitter by Nigel Stanley. Nigel Stanley said: Has written about the TUC's new pensions report @touchstoneblog http://snipurl.com/rphf2 and @iibcon http://bit.ly/QtPQT […]

  5. Web links for 9th September 2009 | ToUChstone blog: A public policy blog from the TUC

    […] Why don’t pension critics attack the fat-cats? Nigel has a guest post today on Liberal Conspiracy, with more comment on our pensions story from earlier today […]

  6. Pensions tax relief | ToUChstone blog: A public policy blog from the TUC

    […] pm on 12 Sep 09 by Nigel Stanley There’s been a lively debate over at Liberal Conspiracy on my post on public sector pensions. Many of the points are from the small-state right and entirely […]





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