'Look yonder above the great concrete bunker on Dame Street and tell me what you see."
The vantage point is the top floor of City Colleges, Wexford Street; the audience: participants in a professional insolvency course, mostly ex-bankers, barristers and solicitors; the subject: how the new insolvency laws integrate with pensions; and the view: over the rooftops, to the Central Bank. The class stares out the window, squinting into the sunlight. "We see nothing but sky and some clouds."
"Look closer," I urge them. They lean towards the big windows, their curiosity primed by the oddness of the opening question of the lecture.
"What you can't see," I tell them, "is the alien spacecraft hovering over the Central Bank – that's the one holding the unfunded liabilities. It's only occasionally that the cloaking technology breaks down and we can catch glimpses of how big it is and when it's likely to enslave us, just not today."
The laughter disappears once we get into the debts that are set to remain unreported in the national accounts until disclosure becomes mandatory from 2017 by EU decree. The combined debts already clocked up by both public sector pensions and the social insurance fund, the so-called unfunded liabilities, total €440bn in today's money value – that's over twice the national debt – so you'll see the point about the cloaking device.
That estimate is based on a rare glimpse in 2009 when data reached us from the Comptroller & Auditor General which put the present day value of public sector pension liabilities at €108bn by the end of 2008, rising to €116bn by 2009. Meanwhile, a KPMG actuarial study the following year put a value on the future shortfalls from the Social Insurance Fund at €324bn.
A recent blog by the Department of Public Expenditure and Reform (DPER) claimed an €18bn fall in public sector pension debts from the high water mark of €116bn to €98bn by 2013. Are we seeing some progress? After all, the same number at the Millennium and before the insanity of 'benchmarking' was a much more manageable €25bn. Back in those days it hardly seemed to matter that large increases in pay for an ageing workforce on final salary schemes would turbo-charge pension liabilities – unless dampened by moving to career-average pay or capping corpulent pensions above which taxpayer subsidies stopped and self-funding took over.
Although heralded by the DPER as purely the result of recent reforms, it's hard to verify – liability calculations, based on lots of moving parts, including deaths at one end and early retirement on the other, have a margin of error of between -5 per cent and +10 per cent, so take your pick.
In responding to questions, the DPER confirmed last week that the new estimate breaks out as €46.6bn in liabilities to those already in retirement, €47.2bn for those still serving and €4bn in preserved benefits for 50,000 former staff. The average liability per public sector retiree is €331,000, with 141,000 now drawing pensions; meanwhile the average per serving member is €162,000 across 291,000 personnel.
That's a total membership approaching six times the capacity of Croke Park, with pension liabilities of €98bn and a ratio of employees making contributions to retirees of two to one, compared to a general population average of six workers to every retiree.
So just how are these payments to be funded? Public sector unions, now firmly shifted into the language of 'restoration', want taxpayers to foot most of the bill, and for the Pension Related Deductions – tax relievable debits from gross salary ranging from 7 per cent to 9.5 per cent introduced in 2009 – to be abolished.
Labour Party Minister Brendan Howlin TD, responsible for public sector reform, in responding to questions in the Dail raised about a report on teachers' pensions, set expectations and played to the union gallery: "The pension levy contribution is a misnomer. It was called that by the previous government, but it is a levy on pay. I hope it is not a permanent feature, and I said that to the unions when I met them. In my judgement, it is a mistake for unions to characterise it as a pension contribution, because the fear will be at a future date that it will be subsumed into the calculation of pension contribution."
But the minister's officer corps use the Pension Related Deductions to fund over a third of the future cash flows for the next 50 years. These are calculated as €367bn in future payments, 21 per cent funded by normal staff contributions
and 36 per cent or €132bn coming from the so-called 'Pension Levy' which the unions deem temporary –with the rest coming from taxpayers. What union chiefs don't reveal is that, if their restoration politics are successful, then tax transfers, mostly from the private sector, have to nearly double from 43 per cent to 79 per cent of the total costs.
The private sector is already grappling with chronic under-funding of private pensions, where the average pension pot at retirement is a tiny fraction of the €331,000 per public sector retiree and an even smaller fraction of the €162,000 for serving members. In the private sector, four in 10 have no private pension fund at all and are reliant on the Social Insurance Fund to deliver its promises on the Old Age Pension, a commitment that cannot be met without raising PRSI or radically pushing out the retirement age. Meanwhile, the Government has increased the raid on those that do have private pensions this year to 0.75 per cent of all savings and is expected to have reaped over €2bn since first announcing its 'Jobs Initiative' strategy in May 2011. More is known about alien spacecraft over the capital than about where all this money went, how many jobs were created and what was the cost per job.
What can be said with certainty is that the Government, despite what it says, will be tempted to keep both pension levies, the public and the private, as permanent revenue raisers. In doing so it will face robust opposition from union chiefs determined to offload costs on to the private sector, but sheepish opposition from the private pensions industry more concerned about maintaining tax relief to avoid a collapse in sales around which the industry is incentivised, than looking after its existing customers.
An apartheid retirement society beckons as private sector workers desert the savings model ransacked by the State, and deeply embedded union chiefs successfully fight tooth and claw to offload future costs to non-members.
In responding to my question about the use of the Pension Related Deduction in its long-term calculations, the DPER already seems poised to surrender: "We have never stated that that Pension Related Deduction is permanent. As it is an emergency (FEMPI) measure, by definition it cannot be in its current form. Nor is it intended as a means of meeting annual pension costs, it is not a pension contribution. It is a fiscal consolidation measure that is paid solely by serving public servants."
Indeed – and will inevitably be shouldered by non-members.