Those unfunded pensions.

The state employs, give or take, after Gordon Brown’s lunatic handling of the economy about half the people in the workforce. Many of these people are on unfunded final salary pension schemes. What people who want to suggest that “we’re broke” do, is add the net present value of some 20m public sector pension liabilties and tack that onto the National debt. Then they add the banks (at an effective value of the assetts of Zero) and suggest that we’re much, much worse than any other country in the world.

Now what I am about to say is not to defend Gordon Brown’s idiocy. He took the Deficit to 12% of GDP, and that is utterly unsustainable and probably criminal. But even at this rate, given Japan’s example, we could keep going for a several years before the shit hit the fan. When a quarter of Government spending is borrowed, you do not need to make stuff up to make it appear that we’re in a mess. The fact is that the UK started the Noughties with the lowest share of public debt as a proportion of GDP in the developed world. Because of Browns tax rises since 1997, and sticking to Tory spending plans, he took Debt:GDP from a creditable 43% to an excellent 30% by 2000.

Since then, he’s spent with the care and concern of a man urinating after 13 pints. That is not in dispute. The speed at which the debt is increasing is the issue. Not its absolute size, which for the UK remains lower as a percentage of GDP than Germany (though we will overtake them soon) France, Italy, the USA and the outlier on the list, which does not have a AAA rating, Japan.

I digress. People with an axe to grind often whack a number they claim is the unfunded public pension liability, and another “the cost of the bail out”. Both are meaningless.

The banks are financial assets on which the state is likely to make a return. They certainly are not going to lose everything they invested. To add that to the debt makes no sense at all. Unfunded pensions are more complicated.

Why are pensions unfunded? For the simple reason that a manager of a pension pot of the scale nessesary to fund the civil service superannuation scheme would wield more power than the Chancellor, and probably more power than that of the Prime-Minister too.

So the ‘liabilities’ have become just another ongoing cost of employing existing civil servants. To add a net present value (what’s the discount rate going to be? how are you forecasting indexation?) is to apply a meaningless number to a problem that isn’t there. There is no rating, the cost doesn’t go up or down with the country’s Credit rating. It is not ever going to be called in one go. It is an annual cost built into budget forecasts. No country in the world puts a value on the unfunded pension liabilties of public sector workers, nor does any country “fund” such a scheme (except Norway, but they’re a special case with options not open to the rest of the world). Public sector pensions are paid everywhere out of General taxation. My guess is in the event of a severe budgetary crisis, it will be the welfare junkies who can work who will feel the pinch, not the pensioners, who can’t.

To whack it onto the national debt just demonstrates ignorance. There are major problems with the state’s finances. Public sector pensions just aren’t one of them.

Of course if you wanted funded pensions, the only way to do it would be to have personal pensions for everyone and ban final salary schemes. But that would simply add another burden to the Generation that’s already paying off Gordon Brown’s legacy. That of course is an issue for another post.