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Dublin: 9 °C Thursday 25 April, 2019
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Only way to pay young public servants equally is to end generous pension regime

When addressing public sector pay, the big elephant in the room isn’t just the upfront costs of recruiting new entrants, Aaron McKenna argues.

Aaron McKenna

YOUNG TEACHERS STOOD down the back of the hall at their union’s conferences this week holding signs demanding “Equal Pay for Equal Work”.

Their colleagues sitting in front of them are many of the same people who put up a weak fight against the introduction during the recession of lower pay scales for new entrants in order to preserve some pay and pensions entitlements for themselves.

The Teachers Union of Ireland reckons that new recruits will earn €300,000 less over a 40-year career than their older colleagues. That is staggering, unfair, and something that has been repeated across many parts of the public sector.

These same unions and their older members will now shed crocodile tears for their younger colleagues, while likely thinking about how they can get pay restoration for the newbies wrapped up in some deal that will give a few percent to themselves off the top as well.

The tough talk of unions in many parts of the public sector seems to be geared towards forcing a return to social partnership and its upward-only salary reviews that dramatically ballooned the public pay bill and created a significant gap in favour of public workers over their private colleagues with similar qualifications.

The big elephant in the room when addressing pay isn’t just the upfront costs of recruiting new entrants. The taxpayer is almost alone now among employers in providing defined benefit pensions to its workers.

These pension schemes have been long proven to be untenable Ponzi schemes, as the contributions of current workers struggle to pay out on the promised benefits of retirees until the whole thing collapses – leaving everyone short.

Benefits

The reason that the scheme has continued in the public sector is because the taxpayer has deeper – near ending, some might think – pockets to pay out promised benefits; and the unions involved have the power to bring the country to its knees should their pensions be touched.

Most people with a pension outside the public sector now have personal retirement savings accounts (PRSAs), where the cash is lodged into an account that is invested over time to give them a sum of money to pay for their retirement.

Where employers contribute to these pensions, it is typically done on a matched basis; where they match the contributions of the employee up to usually 5% or 10%. The fund belongs to the individual and isn’t being used to pay out somebody else’s pension in the meantime, such as with defined benefit (DB) schemes.

Companies that make pension contributions usually do it as a way to share their success. It is rarely offered by employers who have recently emerged from bankruptcy protection or who are still spending more cash every year than they collect.

The CSO is obligated to count the unfunded public sector pension liabilities of the state, which they reckon amount to €98 billion at present value.

That is the cost if the state was to buy out everyone’s pension, give them a PRSA and fill it with funds sufficient to pay out on the promises that have been made in their contracts.

What the state does instead of fill public sector workers PRSA funds is simply pay out pensions from the cash they collect today. Taxpayers and public sector workers who contribute to their pensions all pay for pensioners, and the long-term liability is ignored.

Costs

It’s worth noting that the numbers employed in the public sector have ballooned since the 1990s, as has the amount they’ve each been promised through social partnership. So over the next couple of decades as people retire and are replaced, the pay and pensions bill only go up and up and up.

This is one of the core reasons why pay for new entrants has been cut: Not just to reduce pay costs today, but to try and contain the pension’s costs over the long run.

I think we owe it to future generations to tackle this problem seriously, and look at restoration of equal pay for new entrants alongside a total reform of the pensions benefit provided all public servants.

The state should take the hit and buy out the pension’s liability and switch all public sector workers to PRSAs, into which the state will match contributions of 5 or 10%.

This would increase the cost to us taxpayers today, but dramatically decrease the cost of funding pensions over the long run.

Given that many of us at work today will be retiring when these liabilities come due, it is in our interests not to see more and more of the tax take in 30 or 40 years going to pay unsustainable promises made today.

If we were to borrow the €98 billion required to fund current liabilities at the 2.35% interest rate the NTMA secured on a 100-year bond this week, it would cost taxpayers €2.3 billion per year to service that bond. The cost of paying public sector pensions today is €2.5 billion per year, for comparison.

If we then switched to a regime of contributing 5% to the PRSAs of public sector workers, it would cost another €750 million per year; or €1.5 billion obviously if we contributed 10%. The taxpayer would either need to find this additional €750m to €1.5bn per year or take it off spending elsewhere.

This looks like a big cost today, but it is minimal compared to the real increasing cost of public sector pensions when each of the 300,000 currently employed in the service retire over the coming decades.

Unsustainable

As they live out their hopefully long retirements of 20 or 30 or more years, we will need to replace them and the total cost to taxpayers each year will only go in one direction.

The unions, of course, would grind the country to a halt if we seriously considered this proposal. Why? Well, consider this: The average salary in the public sector – when you divide the number employed into the wage bill – is €50,071 per year.

If the state contributed 5% into the PRSA of a new employee who will earn around the average over time; and that person matched that 5%, it would lead to a pension of €20,436 per year on current money.

€11,976 of this is the state pension and €8,406 comes from the fund that would be raised. That doesn’t include a generous lump sum, which public sector workers receive upon retirement.

Sounds comparatively small for a public sector pension, doesn’t it? Goes to show how generous the current regime really is.

If we don’t do this then new entrants today and after the next economic crisis, when we realise our pay bill is once again unsustainable, will suffer. So will people who rely on public services, when the only option is to institute recruitment bans over several years and decimate services.

An unsustainable public sector pay and pensions regime is bad for all of us, except of course those in receipt of a generous payout.

We’re likely heading back to pay restoration talks in the near future. A brave and far sighted political system would take on the battle to reform the system now rather than wait.

It’s unlikely to happen, and we’re likely to see plenty of youngsters standing down the back of conference halls in decades to come when they’re screwed out of fair pay so the taxpayer can keep up the untenable promises made to today’s workers.

Aaron McKenna is a businessman and columnist for TheJournal.ie. You can follow him on Twitter here.     

Read: Unequal pay is driving graduates away from teaching, says union

Read: Inside Ireland’s best workplaces, according to the people who work there

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