Sunday, January 2, 2011

Promises made: promises broken.....

About five years ago, I read an online advert for a job in the UK civil service. I can't quite remember the job title, but it was one of those cultural transformation positions that were so popular during the Blair years. You know the sort of thing; a smoking suppression adviser, an anti-alcohol campaigner, or a you-should-treat-your-kids-more-humanely consultant.

There was one aspect of the job description that I remember with crystal clarity. The job came with a non-contributory pension that was worth 16 percent of the advertised annual salary.

In these days of budget austerity, public sector pensions seem unduly generous. State pensions, on the other hand, will be insufficient to maintain a dignified standard of living. Likewise, private pensions will also be pitifully low, due to declining stock markets and near zero interest rates.

This generosity also sits uneasily with the reality that public sector pensions are running large deficits. The civil service pension system illustrates this point (see chart above). According to the Office of Budget Responsibility, this scheme ran a deficit of £1.2 billion in 2010. By 2016, this operating deficit will rise to £2.7 billion.

Other public sector pensions, such as the NHS and Armed Forces schemes are running similar large operational deficits. And don't even try to think about the deficit numbers these schemes will start to run up by 2025.

With operational deficits running into the billions, it is extremely unlikely that public sector pensions will survive in their current generous form. Nevertheless, I keep thinking about that job advert. The person who successfully applied for that job signed a contract with Her Majesty's Government. In return for their labour services, they were promised a generous pension. The government will, in all likelihood, renege on that contract.

The accounting necessity for reducing public sector pensions is compelling. Yet, one must feel uncomfortable about political system that repeatedly promises things it cannot deliver.

Extravagant commitments have been the main characteristic of modern British government for at least four decades. It is reflected in bloated public sector employment, unrealistic pension provisions, and above all, in the unsustainable rise of public sector debt.

The hallmark of future public policy will be quite different. It will be one of broken commitments, deteriorating services, and deep disenchantment.

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