The pensions problems facing many of the developed world are well documented and are largely caused by changing demographics, including rising life expectancy, more people in education, retiring earlier and the ‘baby boomers’ nearing or entering retirement. All of this has contributed to unsustainable pension systems and hence a need for reform. The latest review is by Lord Hutton and looks at public-sector pensions. It makes a number of recommendations about reform. The main thing to come out of the report is that public-sector workers will have to pay larger contributions. work for longer and may receive less in their pension.
Many public-sector pensions have been based on a final salary scheme, which gives workers an extremely generous pension on retirement. The proposal is to change these to career average pensions, which will reduce the generosity for some and hence play a role in reducing the pension deficit. He suggests that public-sector retirement age should be increased in line with the state pension age, which will simultaneously increase the number of workers and hence output, but also reduce the number of years spent in retirement and hence reduce pension payments.
The government will now consider the recommendations laid out in the Hutton Review, but will need to bear in mind potential reactions by the unions, which have already hinted at strike action if the proposals go ahead. As the TUC general secretary, Brendan Barber, said:
‘Public-sector workers are already suffering a wage freeze, job losses and high inflation. They are now desperately worried that they will no longer be able to afford their pension contributions, and will have to opt out.’
With such concern about these proposals, and yet an unarguable case for pension reform, this is certainly an area where we will undoubtedly see significant media coverage.
Articles
Hutton reveals his pension plan – and is blasted by unions Guardian, Polly Curtis (10/3/11)
Pensions anger from unions following Hutton review (including video) BBC News (10/3/11)
High-wire act fails to balance public and private Financial Times, Nicholas Timmins (10/3/11)
A fairer pension deal that is long overdue Telegraph (10/3/11)
Hutton: This changes the basis on which I accepted the job, says teacher Guardian, Jessica Shepherd and Jill Insley (10/3/11)
No winners over public sector pensions if ministers or unions rush to battle Guardian, Polly Toynbee (10/3/11)
Career-average pensions: How do they work? BBC News, Ian Pollock (10/3/11)
Hutton pensions review: Q&A Telegraph, Harry Wallop (10/3/11)
Tackling the intractable The Economist (10/3/11)
Trade unions: pension reforms are unfair and misguided Guardian, James Meikle (10/3/11)
Report
Independent Public Service Pensions Commission: Final Report Pensions Commission, Lord Hutton, HM Treasury, March 2010
Independent Public Service Pensions Commission: Interim Report Pensions Commission, Lord Hutton October 2010
Questions
- Identify the main causes of the pensions problem. Explain how each issue has added to the pensions deficit.
- To what extent is it equitable that public sector workers should pay more in contributions and retire at the same age as the state pension age?
- Who will benefit the most from a change from final-salary to career average schemes?
- How might higher contributions affect the incentive to work? What could we see happen to labour supply? Think about both income and substitution effects.
- What are the union’s main arguments against the proposals? To what extent Is striking likely to solve the problem?