Tax burden of unfunded public sector pensions

[patslatt]

People who now retire at 60 years of age can expect to live to ripe old ages of 85 or more. This increased life expectancy has prompted most of the private sector to withdraw from pensions based on final salary (defined benefit plans) and to substitute plans based on the investment of pension contributions (defined contribution plans). The problem with the latter is that they need contributions starting at a young age as well as good investment returns,by no means guaranteed, to provide good pensions.

Given that the private sector electorate in theory employs "public servants", why should the public sector be allowed to continue with defined benefit plans with little or no heed to future costs? Shouldn't retirement ages be increased to age 68 given increased life expectancy?

Those public sector pension costs will have to be paid for in higher taxes by the children and grandchildren in a form of intergenerational income transfers. The assumption is that (unlike Argentina) the children will be machochistic enough not to default when they become taxpayers.

Actuarial calculations of pension liabilities can be very complex, so instead some simple arithmetic is used here,with a zero inflation assumption, to illustrate the enormity of the pensions tax burden.

Most public sector workers have lifetime job tenure,a privelege enjoyed by distinguished professors and,in past centuries,well connected aristocrats, so chances are most of them will complete the required number of years to qualify for a full pension.

Take a typical public sector worker retiring at 60 on €40,000 final year pay that is typically 25% more than the private sector industrial average pay. With a pension of 50% of final salary, the starting pension is €20,000. This is indexed to pay increases, which are assumed to be 1.5% a year, the same as estimated productivity growth in the economy. Over 20 years, the total pension amounts to about €580,000 in today's euros.

If the public sector worker is in management or a profession, the final year salary will be €60,000 plus and the total pension amounts to €870,000 in today's euros.

How much of a tax burden is required to fund these pensions? With 1 in 5 people in the workforce in the public sector, about 4/5ths of the unfunded portion of the pension is paid for in private sector taxes. Assuming that the public sector worker's own pension contribution contributes one third to the funding, the balances unfunded would be €380,000 and €575,000. Each private sector worker would then contribute on average €76,000 or €115,000 in taxes to the pensions. This is a major portion of private sector savings.

[Ronanr]

Assuming that the public sector worker's own pension contribution contributes one third to the funding

Source for this assumption?

What proportion of their own pension will a public servant paying superannuation and PRSI Band A (ie, post 1995 recruits) have paid if they serve 40 years and have a pension for (say) 15 years?

[Ronanr]

Take a typical public sector worker retiring at 60 on €40,000 final year pay that is typically 25% more than the private sector industrial average pay. With a pension of 50% of final salary, the starting pension is €20,000.

I wonder how you got these figures patslatt?

I did a notional calculation of such a person (assuming a post-1995 recruitment) on the Dept of Finance Public Service pensions calculator.

See it here:
http://www.cspensions.gov.ie/Post95E...Calculator.asp


According to that, such a person would be due a pension of €9,079.

Quite a lot less than you suggested.

(Being a post 1995 recruit, such a person would pay Band A PRSI, and so of course would be entitled to a contributory Old Age Pension from age 66 on top of this of €10,921.27 per annum, just like virtually all other PAYE workers.)

This would bring the total over-66 income to 20,000 Euro alright, but only 9,000 Euro of it would be a civil service pension.

[Liam_Armenia]

Benchmarking has had a massive impact on the longer term ulitmate economic impact of the cost of public sector defined benefit pension arrangements. This same exercise has also massively inflated the current public sector pay bill, but due to rising tax receipts, the impact has been temporarily disguised.

Many public servants earn their salaries and pensions more than once. However, many others do not. Political interference, relativities and the unabated powers of public sector trade unions have created a massive and permanently rising public sector pay and pensions bill. Just as the economy swung quickly from loss to profit, when the reverse happens, the change will be more dramatic.

Fianna Fail can rely on the huge core vote of Ireland's public sector to keep them in the Dail for years to come. In the end, this is what benchmarking was all about.

[Ronanr]

Benchmarking has had a massive impact on the longer term ulitmate economic impact of the cost of public sector defined benefit pension arrangements. This same exercise has also massively inflated the current public sector pay bill, but due to rising tax receipts, the impact has been temporarily disguised.

Sounds lie a bit of hyperbole there. The pay increases received by public employees due to benchmarking, (particularly for those at the lower end of the salary scale) were not very out of line with pay increases in the economy generally.

Cannot understand why benchmarking alone will burst up the state's finances

[Bobb]

Benchmarking has had a massive impact on the longer term ulitmate economic impact of the cost of public sector defined benefit pension arrangements. This same exercise has also massively inflated the current public sector pay bill, but due to rising tax receipts, the impact has been temporarily disguised.

Sounds lie a bit of hyperbole there. The pay increases received by public employees due to benchmarking, (particularly for those at the lower end of the salary scale) were not very out of line with pay increases in the economy generally.

Cannot understand why benchmarking alone will burst up the state's finances

Ronanr, you're a civil or public servant, right?

[Ronanr]

Why do you want personalise this about me?

[Bobb]

Why do you want personalise this about me?

I don't, but it's relevant in this case

[Ronanr]

Why is it relevent?

[Nedz Newt]

Well, I AM a civil servant, and I'll tell you my experience of benchmarking and you can make what you will of it.
I should say I'm in a managerial position, which requires qualifications that can very easily find an equivalent in the private sector, in what is quaintly called "the professions". (I would like all those who decry benchmarking henceforth to specify which public servants, in which positions, are doing better than their identifiable equivalents in the private sector - thats the only reason I allude to my own position)
When benchmarking was mooted it was very easy to compare salaries bewteen us and our equivalents in the private sector. And sure enough, WE were miles behind. It was also relatively simple to compute the value of our pension entitlements in the civil service and cmpare that to what a private sector employee would have to contribute to achieve the same pension entitlements.
More contentious was placing a avalue on the "permanent" nature of civil service jobs.
Anyway, our own submission, with computations attached, reckoned we would need a 12% pay increase to bring us into line with our equivalents in the private sector. Note, we would still be trailing in salary terms, as this was weighted to take account of pensions and permanency.
In the end, we were awarded 8.5%.
Fair?
Who said anything about fair?
What happened was, the benchmarking body awarded us just enough to make up think twice about jumping the fence into the private sector.
Benchmarking never was about introducing equivalence with the private sector, it was all about a) a system where all public sector claims could in future be dumped and b) a sop to those in positions which were in demand in the private sector.
I should add, I have no particular complaint about all this.
If there had been no benchmarking process, I would have jumped.
They correctly identified me and my ilk as being satsfied with the 8.5%. I was in a project I was dteremined to see through, and have since been promoted, and also want to see that through.
But don't annoy me with ill informed bullsh!t about benchmarking being a trial for those in the private sector, unless ye have exact grades/professions and specific inustices.
Or could it be ye just haven't a clue what ye're talking about?