A useful piece today from Watson Wyatt on the government’s unfunded public sector pensions liability. They estimate this to be £690 billion, more than twice the size of our declared national debt. What’s more, it’s index-linked. And Watsons haven’t even included the substantial deficits in local authority pension schemes.
All of which makes Gordo’s boasting about how he’s slashed government debt ring pretty hollow. The second of his famous Golden Rules- his Sustainable Investment Rule- calls for net debt to be kept below 40 per cent of GDP. But adding in this unfunded pensions liability takes us to 92 per cent.
And let’s be clear- pension liabilities are a forward commitment to pay, just like any other kind of debt. In fact, just like those forward service contracts with the providers of all those PFI schools, hospitals, roads etc. Not to mention the massive off-balance sheet liabilities now being run up to renew the railways.
In this country, unfunded pensions only exist in the public sector, the idea being that members needn’t worry about not getting paid out, because when the time comes the government will raise the dosh by just taxing the rest of us. No private sector company would be allowed to get away with unfunded pensions on the basis that they can always screw more out of future customers. And certainly not since that fat Labour MP fell off his yacht.
Of course, as public sector employees are already discovering, governments will always welsh on their liabilities if they possible can. Which is why Unison is now balloting its 800,000 members on strike action over the plan to raise their retirement age from 60 to 65.
None of which takes any account of the other great slug of unfunded pension liabilities- the state pension. This runs at about 5 per cent of GDP annually (taking the sum of the basic state pension, State Second Pension, Minimum Income Guarantee and Pension Credit, Winter Fuel Payments, Over 75 TV licences, and Christmas Bonus). So capitalising that lot, using the same discount rate as Watson Wyatt, gives a further liability of 250-300 per cent of GDP!
So much for fiscal prudence, although I s’pose we have to blame Lloyd George and Bismarck, rather than Gordo, for unfunded state pensions.
(Footnote: S&M also has a post on the Watson figures, although he seems to think they’re not much help. Actually, it’s a slightly quirky post in which he seems more concerned with demonstrating to some teenage girls that economists have bigger ones than accountants. Maybe he’s reached that difficult age. Although surely he knows that Watsons are actuaries rather than accountants…you know, actuaries are those guys for whom accountancy was too exciting…)