Business Irish

Tuesday 17 October 2017

We must ignore protests and slash our unaffordable public sector pension bill

More protests outside Leinster House against cuts can be expected from the Civil Public and Services Union in the latest row over public servants’ pay
More protests outside Leinster House against cuts can be expected from the Civil Public and Services Union in the latest row over public servants’ pay
Richard Curran

Richard Curran

The ugly but necessary row about how much we pay our public servants looms large once again. It is necessary because getting it wrong can see billions of euro wasted through unfair and excessive pay rates.

It is ugly because the debate inevitably ends up making generalisations about the entire public sector. It also ends up pitting private sector workers against public sector employees and it tends to focus on how much they are "costing" us rather than how much they "earn".

The government and public sector unions are expected to begin talks shortly on a new pay deal. Gains such as pay rises are expected to be offset by reform of public sector pensions. The Government may seek to increase the contribution made to public sector pensions made by employees.

It may also seek to end the practice, which applies in some parts of the public sector, where future pension payments are linked to pay increases in that grade. Linking future pay increases to inflation would save the exchequer up to €16bn over the next 70 years.

Getting the public sector pay and pensions bill wrong is dangerous for the exchequer. To put it in context, in 2013 the public sector pay and pensions bill was around €17bn, after pay cuts, cuts in staff numbers, hiring freezes and a pension levy were introduced.

If the Government had not taken corrective action after the crash, that bill would have been €7bn per year more, or €24bn per year.

This is not about showing how highly paid our public servants were but is more about showing how utterly unsustainable, destructive and stupid government policy was on public sector pay between 2000 and 2008.

The country hired an extra 73,300 public servants in that period. Between 2008 and 2013, the numbers reduced by 24,100.

When it comes to pensions, public servants were hit with a pension levy. Those joining after 2013 have lesser pension benefits with their defined benefit pensions calculated on their average salary over the career as opposed to their final salary.

Despite these cutbacks, public sector workers do enjoy pension benefits that are simply not available in the private sector and which, if unchecked, are simply not realistic or affordable into the future.

Public sector trade unions are determined to see the end of the FEMPI legislation under which a declared "emergency" allowed the government to introduce cuts.

They want their pay levels restored to previous boom-time rates. Unfortunately, in many cases that is simply not possible. The emergency might be over but the previous pay and pension levels were unsustainable anyway.

Around a quarter of exchequer revenues during the boom were linked to the property market and construction sector. They were not only unsustainable, they are not coming back.

The national debt in 2007 was €39bn. Today it is around €200bn. It is too simplistic to say the emergency is over so "normal" business will resume. Boom-time pay rates were never normal.

When it comes to pensions, the public sector bill had been rising even during the crash. Incredibly, it was €2.2bn in 2008 (the year of the crash) but €3.2bn in 2012 - two years after the Troika bailout began. The bill only began to fall after that.

Some of those austerity era cost increases related to one-off lump sums payments as people took earlier redundancy.

Public sector trade unions will argue that staff numbers have been cut in important front-line services during the crisis and hiring freezes have led to major gaps in public service provision. And they have a point. We have seen it in Garda numbers and nurses.

The breakdown of cuts in staff numbers is interesting. Between 2000 and 2008, the number of HSE employees shot up by 28,000. In 2008 there were 110,000 HSE workers. In 2013 there were 100,000 or 10,000 fewer.

In 2013 there were 200 more medical and dental staff than in 2008 but nearly 4,000 fewer nurses. There were 1,000 more primary teachers in 2013 but 3,400 fewer employees in education. These figures do not take account of non-staff agency contract workers or the enormous price paid to get those staff numbers down through lump sums and early retirements.

However, the most striking thing about any debate about public sector pensions is the comparison with what is happening in the private sector. Pensions have been decimated. Around 750 defined benefit pension schemes have closed down in the last 10 years.

This represents six-out-of-10 such plans in the country, with hundreds more expected to close in the future. The switch from a defined benefit to a defined contribution scheme is quite dramatic in terms of future entitlements.

Yet in the public sector, unions say they will fight tooth and nail to defend a system which not only links pensions to a percentage of final salary, but also increases in line with what somebody doing the job in the future will be paid.

Against a backdrop of people who have lost their jobs or have virtually no pension at all, a row over linking future public sector pension increases to the cost of living, versus linking it to the future salary for that job, looks like something from another continent never mind another country.

Yet, public sector unions have a job to do. In a way, as a public sector employee, the affordability for the State of what you earn isn't the issue. It is about what you were offered when you took up the job and what has been taken away from you. That is what people focus on.

This is also what made the boom/bust years so toxic. It is difficult for the vast majority of people to have something taken away, as opposed to never having been given it in the first place.

Any retreat from current public service pension entitlements is a reduction in what someone was given, as far as public service unions are concerned. So, why wouldn't they fight it, however unaffordable it may be?

There is also a tendency in the debate to select the highest-earning civil servants and their enormous pension entitlements and highlight them as if they represented the norm across the public sector.

Many people in the public sector do not earn huge pensions. According to findings by the Nevin Economic Research Institute back in 2014, of the 140,000 retired public servants an estimated 500 were paid in excess of €100,000 per year. And 50pc of all retired public service pensioners received between €10,000 and €30,000 per year.

However, it also found that a quarter of all public service pensioners were receiving pensions of more than €32,500 per year.

Against a backdrop of falling bond yields, poorer investment returns, higher pension service costs, a pension of €32,500 per year would be utterly unattainable for most private sector workers.

Take our universities and UCD as just a random example. It cost €53.8m to service UCD's pensions in 2015. This was paid by the State and the university. UCD collected €152m in academic fees directly from its students that year. This means the UCD pension bill amounted to 35pc of the fees paid directly by students. Surely, that is not sustainable and other universities, I have no doubt, are similar.

Urgent reform of the public sector pension bill is required. It is not about reducing entitlements in a race to the bottom. It is simply that we cannot afford them.

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