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The cost of public sector pensions increased by 65 per cent between 2005 and 2010, during the worst recession in the history of the State. Last week, Minister for Public Expenditure and Reform Brendan Howlin published the Public Service Pensions (Single Scheme) and Remuneration Bill 2011. It restricts pension entitlements for new entrants to the public service. So it will take at least 40 years before we see any savings. And then they expect it might cut the pension bill by 35 per cent.
It took five years to feather their nests, but it will take 40 to claw back half of what they grabbed. That's not good enough! Who will even remember what it was all about?
The annual cost of public service pensions was €2.235bn in 2010. In 2005 it was €1,350m. There were just over 103,000 public service pensioners in 2010, according to the Department of Finance. In 2005 there were 95,000. The number has increased by less than 9 per cent in a period when the cost rose by 65 per cent. There are still nearly 280,000 public servants and another 8,500 will take voluntary redundancy by 2012. But they will do so under the old rules based on higher salaries. So their pensions will be inflated even more.
They don't even have a fund out of which to pay these pensions. If they had there would be no argument. Few people would deny the right to a reasonable pension. But we cannot afford what is being paid out. It makes no sense to go on with this madness, which is destroying the productive part of the economy. Just as private sector employees saw their own defined benefit pension entitlements whittled away, public servants have no right to expect any more. The country's capacity to pay them is greatly diminished. The only reason these ludicrous pensions exist at all is because the people we put in charge have most to gain by keeping them. They failed to exercise proper control.
There isn't a person in the entire Government you could trust to make the right decisions. Mr Howlin stated that there is a clear need for reform of public sector pensions, but he has done nothing about it. He is hiding behind the Croke Park Agreement.
Even if the new pension arrangements were extended to include existing employees and pensioners they would be generous by private sector standards. And we can still not afford to pay them. The economy demands the reform of existing public pensions as well as the new ones.
The last significant change in public sector pensions took place in 1995. Pre-1995 public servants were not required to contribute to their pensions. Those recruited from 1995 are required to pay. But it was a whitewash to appease the private sector. Even though the new recruits had to pay, their salaries were increased to cover the additional pension cost. It still didn't go anywhere near covering the cost of their pensions.
The new proposals are likely to drive a wedge between the old and the new staff. Apart from being paid less for doing the same work, their pension entitlements will be slashed. One of Mr Howlin's claims is that the new scheme will be fairer on the lower-paid workers. That is possible because there is less fluctuation of their career average earnings, relative to those who have moved up the ladder.
Under current rules, post-retirement pension increases are linked to public sector pay. In future they will be linked to the consumer price index (CPI). It is estimated that over the last 20 years pension increases were twice as large as what they could have been had CPI been used instead. Mr Howlin's public sector pension initiative is disappointing. Half the population will be already dead, long before it has any impact on the economy. In order to take a step in the right direction it should apply to existing pensions and deferred benefits, too.
While public sector pensions continue to be paid out of current tax revenue it disguises the real cost. Just as the new scheme should be of most benefit to the lower paid, it is likely that its extension to existing public service arrangements would not unduly affect those on lower income. It would hit hardest at those who are paid the most. While they are working in the service of the State, they might justify their higher pay. But not after they have retired. There is no fat in the economy to live off anymore.
While public servants continue to be insulated from the recession by special arrangements, the private sector is being trodden under foot. This is why we are facing even higher taxes in the next Budget. While the Government blunders its way through the recession, the most vulnerable in society are being hit the hardest. Unjustifiable pension benefits in the public service are being protected, while tax relief is stripped away for private sector pensions. The self-employed are hit the hardest as they may have deferred any pension arrangements. They need tax relief to get back on the ladder.
This is the last year in which contributions to pension funds will attract relief at the top rate of tax (41 per cent). But the imposition of PRSI and the Universal Social Charge on pension contributions, from 2011, means that the real benefit has already been cut to 33 per cent. It is still possible to pay contributions now that can reduce tax for 2010. But you need to act before October 31.
While the private sector is being unfairly treated this is no reason to give up on your retirement plans. The Government will come to its senses and restore balance between public and private sector pension provisions.
The exemption from any reform for existing public sector pensions is an insult to taxpayers in the private sector. The minister confirmed that the old system was not fair. So why does it still exist?
James Fitzsimons is an Independent Financial Adviser specialising in tax and financial planning
