Thursday, October 07, 2010

The attack on public sector pensions

Lord Hutton of Furness has produced his interim report on public sector pensions. This is the important thing you need to grasp: the main reforms are proposed with a specific aim of squeezing revenue out of public sector workers so that the Treasury can pay off the bankers. This is not about fairness, much less about "gold-plated" public sector pensions. It is a simple raid on the future wages of the lowest paid workers for the benefit of the rich. Secondly: this transfer of wealth to the rich is part of an ideologically-driven class-motivated attack on the welfare state. We know the background. There is no urgent need to pay off the deficit. Most of the debt doesn't mature in less than three years, and the cost fo borrowing is still low for the UK. There is also no particular need to pay off the deficit by attacking the public sector. Higher taxes on those who bear most direct responsibility for this crisis could easily pay off the deficit. Alternatively, a redistribution and stimulus-based growth strategy would produce the revenues needed to pay it off. So, these are elective measures reflecting the class interests and the ideological priorities of those driving the policies. And Cameron has made it clear that he intends to make these cuts permanent.

Some context. One of the most shameful things about the last government was the way they proceeded to attack the fundamentals of the pension system without ever consulting the public. In their last term especially, they planned a wide-ranging series of neoliberal reforms as the Blairites became impatient to make their mark in a lasting way. At bottom was New Labour's determination that the burden of pensions should shift from state provision through taxation to private sector provision, based on financialised packages. Peter Mandelson had been very impressed on a 1996 visit to Chile with the privatised pension system set up under Generel Pinochet. He in turn impressed the incoming Blair government with his findings. This aspect of New Labour thinking arose as private sector employers were attacking their own defined benefits and final salary pension schemes, as part of their drive to raise shareholder value and reduce the cost of employment. So, just as the private sector pensions system was falling to pieces, the government saw fit to attack state provision, and a tripartite consensus evolved on this issue. One of the few things restraining the government's blows was that pensioner poverty was a hot political issue. The government found this out to its cost when a political backlash engulfed it over a miserly 90p rise in state pensions in one budget. This was at a time when public sector spending was being deliberately slashed by the government, and the spending as a proportion of GDP sank well below the levels of the Major administration. They could get away with deep, though temporary, cuts in spending on health and education, but on pensions they were forced to retreat. So, the conundrum for the government was how to reduce the amount of state provision in a politically acceptable way. In its last term, with Blairites like James Purnell and John Hutton itching to make their mark, New Labour contracted the services of the princes of capital, such as Lord Turner and David Freud to fundamentally reform the whole benefits and pensions system, with the aim of qualitatively reducing state provision. This involved, among other things, raising the retirement age to levels over and above the age to which many working class people can expect to live.

Now, amid a uniquely devastating global crisis, the government has sought to shift the burden of the crisis from the banks to the Treasury, and ultimately onto the working class. A gold-plated government of millionaires has appointed a gold-plated New Labour Lord, John Hutton, to draft a report justifying attacks on what the Deputy Prime Minister Nick Clegg calls "gold-plated public sector pensions". The result so far is this, Hutton's interim report pending a final report in two years' time. In a nutshell, Lord Hutton - former work and pensions secretary under New Labour - advises the government to increase employee contributions to the pensions, as the most effective short-term way of raising funds for the Treasury. This is specifically cast in terms of raising revenue in the short-term. The government is also urged to increase the retirement age in the public sector, though this is more of a long-term measure as it is considered an unlikely candidate for the immediate fiscal gains the Treasury seeks, and reflects the wider commitment to reducing the scope of the welfare state. Bear in mind that new entrants to most public sector occupations already retire at the age of 65, with the only exceptions being the police, the fire service and the armed forces, who retire at 60 due to the physical demanding nature of their jobs. Hutton also advises the government to look for ways to end the final salary pension system, which he judges is "inherently unfair". Instead, he urges shifting to a pension scheme based on some sort of "career average".

To believe that public sector pensions are "gold-plated", you'd have to be living most of your waking life in the comment pages of the Daily Telegraph. The average public sector pension is worth £7800. In local government, it's £4000, dropping to £2800 for women. For this pension, public sector workers contribute over 6% of their wages throughout their working lives. Hutton, in his report, acknowledges as much, dismissing talk of gold-plated pensions as "mistaken" since for "the most part", these pensions are "fairly modest by any standard". If they seem generous to some, he says, it is because the private sector pensions system has been so degraded over the years. But given such an acknowledgement, the standard of justification required for an attack on such "modest" provision becomes all the higher.

Hutton's approach in that regard is standard Blairite 'modernising' talk. People live to a grand old age these days, we are informed, and the buggers cost more to feed and clothe. Some people, Hutton points out, spend 40% of their lives in retirement. But this is not the case for the vast majority of public sector workers, who are among the lowest paid skilled workers in our society, and many of whom work until the physical nature of their jobs means they can no longer do it. They do not have the option to work longer. Meanwhile, some of the features of some public sector pensions go back years, and years. For example, the final salary principle has been in place in the civil service, in different ways, since 1859 - though the system has been through numerous reforms since then, the basic principle has remained intact. Which obviously means that there must be smething wrong with it. No surprises there - Hutton was once part of a government that thought it high time to abolish rights established in the Magna Carta, such was its modernising zeal.

Further, Hutton notes, provision in the state sector is increasing overall, while defined benefit pension schemes in the private sector are diminishing in value. Thus: "around 85 per cent of public sector employees have some form of employer sponsored pension provision compared to around 35 per cent in the private sector." By the standard perverse logic of 'modernising' reforms, the failure of the private sector is used as an excuse to attack the public sector. Last example: Hutton argues that there is an "imbalance" between employer and employee contributions to pension schemes. It's a vacuous claim. What "balance" is appropriate is surely a value judgment, and the implied assumption that there is an "imbalance" which favours employees is not an explanation in itself - rather it demands explanation. For the sake of context, recent reforms have already capped employer contributions to public sector pensions schemes, leaving employees to foot the bill for any shortfall.

Overall, the claim is that changing demographics mean that a system with characteristics developed in the 19th and 20th centuries is no longer suited to the task, and must be reformed in order to reduce the cost of pensions to the taxpayer. But the cost of public sector pensions is not huge. The value of the main unfunded public sector schemes is approximately 1.7% of GDP, and it is projected by the National Audit Office not to have increased at all in 50 years time. The net public sector pension cost, defined as the difference between present employee contributions and present costs, is much lower, closer to 0.3% of GDP this fiscal year. It can vary depending on the rate of inflation, but it is still eminently affordable. According to Diane Abbott, who has been an active participant in debates emerging from the Work and Pensions Committee's proposed reforms, the Treasury spends twice as much on tax relief for private pensions as it does on public sector pensions. Repeat and underline: raising employee contributions is just a way of squeezing revenue out of public sector workers to enable the government to pay off the bankers. It has nothing to do with fairness, or affordability.

The unions are warning of anger, as well they might. Unison is "adamant" that replacing final salary pension schemes with career-based schemes will sharply reduce the incomes of public sector workers in their retirement, which is in fact the purpose of such reforms. Unite points out that this attack on pensions will hit women the hardest, as 70% of public sector workers are women. The unions uniformly point out that public sector workers are already living with pay freezes and de facto pay cuts. Changes to the calculation of pensions, using the Consumer Price Index on inflation instead of the Retail Price Index, has already wiped billions of the value of public sector pensions.

Noticeably, however, the tone of the responses from Brendan Barber and Dave Prentis, and the GMB, including a cautious welcome of some of the interim report's points, suggests that the larger unions are breathing a sigh of relief that it wasn't much worse, and are themselves unlikely to mobilise over this issue. If anything they want to use Hutton's report as leverage to resist some of the more aggressive Tory plans. In truth, as anyone looking at the right-wing press coverage could detect instantly, the Tories didn't need Hutton to endorse the most slash-and-burn approach. It endorses the basic idea that public sector pensions are unaffordable, which is crap, and encourages the government to undertake both short and long-term reforms to dramatically reduce the cost to the Treasury of those pensions. That's all they needed. Unless the unions do begin to mobilise far more quickly than they have been ready to so far, the Tories will use every opportunity to cut deeper than anyone expected.