George Osborne's Plan B

[Francesca R]

The public sector workers shouldn't have to suffer just because the private sector is so disorganised when it comes to demanding decent renumeration for their work.

This seems to be an assertion that those who have benefitted from superior bargaining power should not have to compensate those who have not. A similar argument could be that chief executives of banks should not have to pay tax to compensate people on income support. Yet, strangely, you don't seem to make it.

 

[lomiller]

Incorrect. The pensions of UK teachers, the Civil Service and the NHS are not funded at all in the sense of assets being set aside today to cover future liabilities. Pensions of local authorities are funded but not "fully" funded. This OECD paper from this year goes into considerable detail and provides a comparison across the OECD. The reported funding ratio of all UKLA pension schemes (which they say they sampled from W Yorks, Merseyside, Greater Manchester and W Midlands, which are the largest) was 58% in 2008/9 using the LGPS's own assumptions. The OECD in the paper also uses a much stricter fair-value-pricing method and comes up with a ratio of 39.9% (Table 4.2 Panel C)

This implies that there is a pot of assets already in trust to provide pensions and that the government will raid it, Maxwell-style, to finance other things. Rather, estimates of the additional public funds that will be required to pay for the future liabilities that will accrue on current promises (because of non-funding or funding shortfall) are what the government wants to reduce.

I’m not sure this supports your argument. Rather it supports the idea that this is a present day accounting problem rather than a case of “future generations being screwed”.

In my case, for example, I currently work in a government job. My pension is ostensibly funded by employer contributions to a defined benefit pension plan. Normally I’d be able to contribute $22K of my pre tax earnings into a private pension plan, but because my employer is ostensibly contributing ~$20K on my behalf this is reduced to ~$2K of voluntary contributions. The problem is that the pension is being underfunded. IOW they are not contributing $20K per year to the pension fund, rather they are paying pensions out of revenue.

By your logic, if budgets get tight it’s acceptable for them to simply say “sorry, we’re not going to live up to the terms we agreed on because we want to save money” when the real issue is that they knowingly underfunded the plan and failing to book all the current expenses associated with that plan.

 

[Francesca R]

I’m not sure this supports your argument. Rather it supports the idea that this is a present day accounting problem rather than a case of “future generations being screwed”.

No. It is indeed a "present day accounting problem" (accounts that contain "forward-looking statements", that is), but it is not possible to travel back in time and demand higher contributions (meaning lower take-home pay) and/or lower retirement benefits from those who have already paid/received those. Any funding shortfall (for a funded scheme) or increase in liabilities (for an unfunded one) can only be corrected by either increasing future contributions (either by taking them out of take-home pay or general taxation) or reducing future benefits. Even if you correct it all next week this is the case.

In my case, for example, I currently work in a government job. My pension is ostensibly funded by employer contributions to a defined benefit pension plan. Normally I’d be able to contribute $22K of my pre tax earnings into a private pension plan, but because my employer is ostensibly contributing ~$20K on my behalf this is reduced to ~$2K of voluntary contributions. The problem is that the pension is being underfunded. IOW they are not contributing $20K per year to the pension fund, rather they are paying pensions out of revenue.

The level of funding paid into public sector (funded) plans in the UK is set by the government's actuary. For them to take no risk of failing to match future liabilities, there should be a high-frequency re-assessment of real pension costs (each time an employee joins, becomes inactive or dies), and the present value of their benefit entitlement should immediately be raised from taxation and invested in index-linked gilts (where the real return is vanishingly small, so you can gather the NPV sum that would be involved). Even this would not immunise the fund against insurance risk (unexpected and unforecastable claims) nor against longevity risk (sounds macabre, but the "risk" people live longer, and the opposite of mortality risk). As soon as either of these risks crystallised there would need to be an open-ended call on more public money.

I contend that no government in the OECD would try to do this, and that they would all (as would an independent observer) regard it as much less ethical than breaking the promise of a defined benefit.

Even if they did do it, the experience over the last 20 years, and very likely the next 20, would be that the taxpayers of the past would have unfairly faced much lower bills (as a percent of household income, not just in prevailing currency terms) due to public pensions than those of the future. Unfair because the only reason for it would be the year of their birth / the generation they were born into.

Unfunded schemes, which, contrary to the posts of other members above, describe the majority of public sector pensions, would simply need to exercise an open-ended call on general public spending at all times. These would impart greater inter-generational unfairness

By your logic, if budgets get tight it’s acceptable for them to simply say “sorry, we’re not going to live up to the terms we agreed on because we want to save money” when the real issue is that they knowingly underfunded the plan and failing to book all the current expenses associated with that plan.

Who, in particular underfunded the pension schemes? Please furnish evidence that they did this knowingly (IE being in possession of correct multi-decade predictions of inflation, real risk-free interest rates, equity risk premia, longevity and fertility rates. Might as well throw in net inward migration trends too).

 

[stokes234]

This seems to be an assertion that those who have benefitted from superior bargaining power should not have to compensate those who have not. A similar argument could be that chief executives of banks should not have to pay tax to compensate people on income support. Yet, strangely, you don't seem to make it.

If you re-read my post, I don't make the argument you suggest because my definition of "suffer" is flexible. I don't see a 20% tax rate increase on someone earning millions as really making them suffer at all, when compared to people on low incomes.

 

[lomiller]

Who, in particular underfunded the pension schemes? Please furnish evidence that they did this knowingly (IE being in possession of correct multi-decade predictions of inflation, real risk-free interest rates, equity risk premia, longevity and fertility rates. Might as well throw in net inward migration trends too).

Your own paper says underfunding pension plans is a legitimate strategy for controlling future expenditures as it limits the inclination to see a blip in the market as headroom to increase benefits. Furthermore you can see quite clearly from my personal example that the tax assessed value of my own pension benefit is higher than what’s actually being contributed to the plan.

So while it’s clear that many public employee pension plans are underfunded what’s really going on is that the employer is knowingly contributing less to the plan then is required to maintain it, possibly for legitimate reasons. From an employee perspective, however what we have is their employer giving them less each and every pay check than they have committed to in exchange for the government backing of their future benefits, but you want to see that backing removed so all they are left with is pay checks smaller than their contracts call for.

 

[Francesca R]

If you re-read my post, I don't make the argument you suggest because my definition of "suffer" is flexible.

Oh it quite obviously is. After all, your definition of "suffer" evidently does not stretch to the beneficiaries of general public spending (usually low income folks) facing reduced utility from that spending so that public sector pensions can be preserved. You do not advance an argument from the ethics of fairness, in respect of asking those who have reaped gains from greater bargaining power / organising for collective action, to compensate those who have not. Rather the contrary.

And according to your own words, the differential (pension) gains are not due to differential talent*. And we know that your preference in this area results in distributional inequity compared to the alternative of redistributing public pension entitlements back to taxpayers.

I don't see a 20% tax rate increase on someone earning millions as really making them suffer at all, when compared to people on low incomes.

And yet you are happy for people on low incomes to pay higher taxes than otherwise in order to maintain public pensions, regardless of whether they are fortunate enough to benefit from those pensions themselves. And/or for people on low incomes to face reduced general public spending in order to maintain public pension entitlements.

Seems to be a morally questionable income-regressive stance to me. Not the first time in your case, you have advanced a number of distributionally regressive policy preferences in other threads in the past. Phoney progressives often do that.

Of course you may respond with a pipe-dream that all the extra cash needed to maintain public pension provision could and will be taxed from the rich. However, for the sake of reality (which you are welcome to regard as hypothetical if that makes you happier), kindly assume for a moment that it is not going to come exclusively from people earning millions, and assume that it will in fact come from reducing general public spending by more that otherwise (across the board--not just defence), or raising VAT, or excise duties, or somesuch.

Now assuming that ordinary folk will foot the (necessarily higher) bill, would your view still be that public pension benefits should be maintained?



*(except perhaps in the realm of talent for success in organizing for collective action to capture/divert excess gains, which would assume it is no easier to unionise in the public sector than the private one, which probably can't be assumed)

 

[Francesca R]

Your own paper says underfunding pension plans is a legitimate strategy for controlling future expenditures as it limits the inclination to see a blip in the market as headroom to increase benefits.

Irrelevant.

Furthermore you can see quite clearly from my personal example that the tax assessed value of my own pension benefit is higher than what’s actually being contributed to the plan.

Which is a definition of "underfunded". What is your point beyond that?

So while it’s clear that many public employee pension plans are underfunded what’s really going on is that the employer is knowingly contributing less to the plan then is required to maintain it, possibly for legitimate reasons.

You appeared to state that "knowingly contributed less" applied in the past as well, and that every and all shortfalls were known in advance, and/or should be corrected as soon as they were revealed (which is not how most governments, and certainly not UK ones, have dealt with the issue). If that is not your position please say, because that is what I read.

From an employee perspective, however what we have is their employer giving them less each and every pay check than they have committed to in exchange for the government backing of their future benefits, but you want to see that backing removed so all they are left with is pay checks smaller than their contracts call for.

Don't understand this.

 

[lomiller]

Which is a definition of "underfunded". What is your point beyond that?

The same point I started with. Pension underfunding is a deliberate decision made at the time the employee receives their paycheck. It is not, as you are suggesting, something that is only realized after the fact when budgets get tight.

Governments by and large have a very good idea how much they need to set aside for each employee each year to cover their pension obligations and for a variety of quite legitimate reasons choose to set aside less and make up the difference out of future tax revenue.

What you are attempting to argue is that when budgets get tight and that tax revenue is hard come by it's ok to unilaterally void the existing contract and never pay the agreed on benefit because somehow it's the employees fault their employer choose to underfund that pension. You are wrong of course. If you want to cut you do it by cutting current expenditures, not by refusing to pay what you already owe.

 

[Giz]

Governments by and large have a very good idea how much they need to set aside for each employee each year to cover their pension obligations and for a variety of quite legitimate reasons choose to set aside less and make up the difference out of future tax revenue.

Do you believe that the government could predict these ahead of time?

i) 2008 credit crunch
ii) 2011 Euro crisis

If not, how on earth do you think that they can gauge short/medium term investment returns?

Do you think that conservative/labour governments can agree on the best recipe for growth and how to encourage technological innovation (and predict how that will unfold)? And also predict the way the world will look 50 years from now?

If not, how on earth do you think that they can gauge long term investment returns?

(And we haven't even gotten into changes in longevity etc)

The government has access to the best estimates available. They will be wrong. (They will hopefully be useful to indicate a ballpark figure... but they will definitely be off to some greater or lesser extent. Because the government doesn't have a crystal ball).

What the government does have, is a temptation to make promises now that will only come due in many years time...

 

[Rolfe]

The rest of us set aside money which should, by the reasonable predictions of the time, have been enough to give us a pension of £x. The financial upheavals of the past three years have eroded these expectations, and we'll just have to make do with about 70% of £x.

What the public sector workers seem to be saying is, never mind all that, we were promised £x, and we insist you give it to us, and we don't much care where the money comes from, even if it will probably be from taxing you people who are already stuck with having to manage on 70% of what you had previously expected.

If the money was intended to be earned from investments, and it simply hasn't materialised, where is it supposed to come from? What sort of productivity would have been required in previous decades to put enough away to fund such generous pensions, at today's and tomorrow's prices, without relying on investment funding?

It seems to me that the public sector workers are simply shouting, "me, me me!" "I don't care where the money comes from, I want what I was promised!" Even if I never produced enough to fund what I'm demanding, and even if it means further disadvantaging those who tried to make their own provisions.

Rolfe.

 

[Francesca R]

The same point I started with. Pension underfunding is a deliberate decision made at the time the employee receives their paycheck.

I agree. A pension fund can hardly be set up as unfunded if that is not the case. And underfunding indeed implies a deliberate decision not to continuously maintain funded schemes as fully funded. I never said otherwise.

It is not, as you are suggesting, something that is only realized after the fact when budgets get tight.

As above, I never suggested that. What I do argue is that it is more unethical to correct underfunding than to reduce liabilities, for the reasons already given, which you have not challenged, but apparently disagree with.

What you are attempting to argue is that when budgets get tight and that tax revenue is hard come by it's ok to unilaterally void the existing contract and never pay the agreed on benefit

Not really. The pre-agreed benefits should have been reduced ("defaulted on") quite some time ago. But successive governments seek to avoid difficult measures as long as they can. That this is what governments in many countries (including the UK) have done does not excuse continuing to do it now.

because somehow it's the employees fault their employer choose to underfund that pension.

I never said that.

If you want to cut you do it by cutting current expenditures, not by refusing to pay what you already owe.

See above--I reject that on grounds of inter-generational unfairness and regressive redistribution. Apparently you do not.

 

[Francesca R]

Do you believe that the government could predict these ahead of time?

i) 2008 credit crunch
ii) 2011 Euro crisis

Rather beside the point. The effect of demographics has been evident since well before the funding shortfalls caused by 2008-11 asset returns, and real bond yields have been very low for at least a decade. It is not that governments could not have seen this coming (although it has been exacerbated by the effects of the last three years). It is that they have avoided doing anything about it other than allow funding gaps to build up and unfunded liabilities to explode.

The UK government would always have had a battle on its hands taking on organised collective interests. Apparently a combination of the present spike in public indebtedness, coupled with an associated higher probability of winning over popular consensus now that it is the correct course of action, means that the coalition government is attempting to fight the battle now. Although that "tailwind" may make the job easier, there is an offsetting headwind working against it which is that the aging demographic that is set to lose out (relative to the status quo) is more electorally powerful today than before. But since most of that cohort no longer has the relatively generous defined benefit entitlements that are the subject of this issue, it may not be such a headwind.

 

[stokes234]

Now assuming that ordinary folk will foot the (necessarily higher) bill, would your view still be that public pension benefits should be maintained?

No, at that point I would agree they should be reduced. If all the money that could be taken from those much more well off has been taken, and all the money from the defence, from questionable business subsidies, from inheritance tax increases, etc etc that can be acquired has been acquired and it hasn't made up the shortfall, i'd agree with reducing public sector pensions. Welcome back, btw.

 

[Rolfe]

I'd rather see the problem addressed by taxing the very rich to increase the state pension, and so easing the burden on all pensioners rather than simply those who previously worked in the public sector.

With Cameron and his buddies in charge, it ain't going to happen. The super-rich must be offered every concession, lest they take their super-richness away to Monaco or somewhere. The ordinary people on the other hand are captive, more or less, so can be squeezed a bit more.

Rolfe.

 

[Francesca R]

No, at that point I would agree they should be reduced. If all the money that could be taken from those much more well off has been taken, and all the money from the defence, from questionable business subsidies, from inheritance tax increases, etc etc that can be acquired has been acquired and it hasn't made up the shortfall, i'd agree with reducing public sector pensions. Welcome back, btw.

Then it seems your "Too bad for the non public-sector that they aren't unionised" idea is to be dropped for the inequitable statement that it was. After which, your stance do not seem to differ from the thrust of the government's proposals in this area. You would disagree with the government on how much to soak the rich and some other matters, but that is tangential to what I am discussing.

 

[Francesca R]

I'd rather see the problem addressed by taxing the very rich to increase the state pension, and so easing the burden on all pensioners rather than simply those who previously worked in the public sector.

Or means-testing the state pension, and dropping the universality of fuel allowances and other things, thus easing the burden on less wealthy pensioners.

Universal welfare is not progressive. Increasing the progressiveness of taxation to compensate for that is probably a lot less efficient than just making it progressive in the first place.

 

[Rolfe]

Yes, that's a reasonable stance. I'm a fan of universal benefits, but for rather different reasons which are probably outwith the scope of this thread.

Rolfe.

 

[Rolfe]

"Too bad for the non public-sector that they aren't unionised"

The problem with this statement is that it completely ignores the problem of where the money is supposed to come from. We thought that by saving a lot of money in pension funds, we'd receive a certain value of pension. Events (dear boy) have transpired so that the saved money simply isn't enough to provide that.

How does being unionised solve that problem? Do unions have some sort of magic money tree? Who would have had money taken from them to make up private pensions, when the pension investments proved to have under-returned?

This seems like some sort of woolly-leftie thinking where the "bosses" have unlimited funds and just need to be forced to cough up. It's not like that. The bosses in small businesses nearly all have their pension provision in the same pension funds as the employees, and they don't have enormous personal wealth, and the companies may be struggling to retain profitablity as it is, in the current economic climate - if they even exist any more.

How on earth would being "unionised" have magically provided oodles of dosh to make up pension shortfalls, for goodness sake?

We're all in this together, but it seems one section of the workforce want to be privileged, and have someone else pay to maintain their earlier expectations - even when "someone else" is someone who has also lost out.

Rolfe.

 

[stokes234]

Then it seems your "Too bad for the non public-sector that they aren't unionised" idea is to be dropped for the inequitable statement that it was. After which, your stance do not seem to differ from the thrust of the government's proposals in this area. You would disagree with the government on how much to soak the rich and some other matters, but that is tangential to what I am discussing.

It's not so much a "too bad for them" statement, as a "they made their bed, and if they're not happy about lying in it, take action to fix it by targetting those that will feel it the least".

 

[Francesca R]

"Too bad for the non public-sector that they aren't unionised"

The problem with this statement is that it completely ignores the problem of where the money is supposed to come from.

That is what special interests do. As one would expect them to.