Irish Examiner -12 key points missing from Public Service Pay Commission

By May 12, 2017Media

12 key points missing from Public Service Pay Commission | Irish Examiner

THE Public Service Pay Commission (PSPC) report published on Tuesday, despite adding important clarity on the value of pensions, falls far short of revealing the gulf between the private and public sectors.

To break down barriers and earn public trust, negotiations based on the PSPC report ought to be in the sunshine, not in the shadows, and televised in the same manner as a PAC enquiry.

What is at stake is whether or not Ireland can avoid a two-tier retirement society with a huge underclass of private sector retirees living in poverty.

Here are 12 key points missing from the coverage:

1. The report dodged putting a value on security of tenure. The Department of Finance has no issue in pricing perks such as cars, preferential loans, and crèche subsidies to redistribute income via the tax system using benefit in kind. But the most valuable perk — guaranteed life-long earnings over 70 years — is still off the radar. Why? The PSPC says it’s because it’s too complicated, but that is untrue. This is a political decision and is a flaw in the report.

2. The headline finding that the value of public service pensions represents between 12% and 18% more on top of earnings is hugely misleading. The comparison is against guaranteed private sector schemes so-called defined benefit types. These cover just 16% of the private sector workforce, are rapidly shrinking in number, and are wobbling under financial strains. This headline benchmark avoids comparison with 84% of the private sector workforce, where six in every 10 has no pension scheme and most of the remainder are under-funded.

3. The PSPC report does not price the guaranteed nature of public service benefits, it puts no value on the difference between benefits secured by taxpayers directly, built into public contracts and the volatile market risk taken in private sector defined benefit schemes. This is a significant error in measurement and is akin to comparing annuity mortgages to endowment mortgages without adjusting for risk.

4. Purely on pay, lower-paid public service workers are better off relatively speaking versus higher-paid public sector workers. While this comes as no surprise, it is unlikely to reverse myths to the contrary but add in pensions and the public sector worker most priced against are the low-paid, late joiners. These are being overcharged for their pension benefits due to the way in which the old age pension integrates with their superannuation pension at retirement. Public sector workers, especially those under age 40 on lower pay, ought to impress on trade union leaders the need to shift from the blunt instrument of flat charging for pensions to customised pricing. This would remove the egregious anomaly where the lowest paid public sector workers are subsidising higher paid, longer servers.

5. The PSPC report dodges running detailed comparisons against European models in favour of general comments about some comparables in education and defence where pay premiums here are 22% and 12% more respectively. The nearest equivalent economy by size and mix is Finland and it is a pity the PSPC did not focus upon it where, like most of Europe, public service remuneration is at a discount, not at a premium, to private sector. Irish teachers at the top end of the scale earn more than one third more than teachers in Finland, where the education outcomes are regarded as the best in Europe.

6. Average private sector pay this year is only now approaching public service averages in 2000. Adjusting for older ages, higher education, and experience, the gap narrows but, purely on pay only, the public sector is still paid a premium over private sector. When pensions and security of tenure are added the premium is quite substantial. Debates on pay differences that fail to account for pensions and security of tenure, are by their nature, flawed.

7. It is always the case that averages mask important detail, but CSO data nonetheless shows that public service average pay in many sectors is nearly fully recovered since the depression. This is borne out in the PSPC report for the lower paid. It is for higher paid that the case for restoration is strongest.

8. Claims that PRSI and pension- related deduction (PRD) costs mean that the public sector pension bill is self-funding are nonsense. The gardaí, who jumped the pay settlement queue, are a case in point. There are 12,800 serving members and 10,200 in receipt of retirement benefits, a ratio of nearly 1:1. The Garda pay bill is €1bn rounded, the pension bill is an extra €311m. Gardaí pay about 12% of the pension cost. The fast-accruing Garda pension is worth an extra €40,000 yearly, putting average remuneration at €100,000, said a recent study. Judges are in Bugatti Veyron pension schemes that accrue twice as fast as gardaí.

9. In 2001, the total public service pension bill was €876m but before the economic crisis it had doubled to €1.58bn by 2006 and today its doubled again to €3.3bn. For every €5 going out in public service pay, €1 is going in pensions. The PRD recovers only 22c of every €1 in pensions. These ratios are deteriorating and the reason is simple, the public sector workforce is aging, as is the population generally. The most recent actuarial report for Ireland’s largest defined benefit scheme puts average life expectancies well into the 80s. It is rising each decade, so unless 75 become the new 65, costs are going to go through the roof.

10. The net present value (expressing future deficits as a capital sum today) of the public service pension debt is €100bn. The net present value of the black hole in the Social Insurance Fund (SIF), 85% of which will be old-age pensions, is €324bn over the next four decades. These are real black holes. Both will move higher. The five-yearly actuarial assessment on the SIF, time-dated to 2015, is due shortly. Public sector workers who joined after the mid-1990s have their benefits part-paid by the SIF through PRSI Class A and so are exposed on both fronts. It’s quite clear that either social insurance goes up or benefits must be delayed or cut.

11. The PRD is a tax write-off, a fact rarely aired in public debate. This write-off is in addition to normal tax relief on pension contributions, greatly lessening the impact for higher tax rate public service workers. Replacing the PRD with pension contributions first ought to be customised to the scale of the benefit to stop lower- paid worker cross-subsidie. Secondly, tax relief needs to be equalised so that private workers are not discriminated against.

12. Ideally, Ireland ought to decapitate public sector pension accruals at a level that is affordable (likely to work out close to the average industrial wage) and press forward with a universal pension scheme that doesn’t differentiate between public and private sector workers and is built with real assets and credible levels of contribution from employers and workers alike. There is no such recommendation in the report.

Irish Examiner Article 12th May 2017: