The knee-jerk reactions to yesterdays headline that public sector pensions cost us £47,000 each is to say abolish them. Unfortunately, it’s not that simple.
There is no fund for paying public-sector pensions; the money comes from future taxes. If we closed the pensions immediately for both new and existing employees, then an alternative would have to be provided.
Let’s suppose we moved to a defined contribution pension with an employer (i.e., taxpayer) contribution of 5% of salary. The current public-sector wage bill is £157.7bn a year, so taxpayers would need to contribute £7.9bn a year towards a new public-sector pension fund.
The sensible course would be to close them for new employees while moving existing ones on to a less generous option, such as an average salary scheme for future accrual.
Public sector workers should also contract into the state second pension. Currently, they are opted out because their employers (i.e., you and I) pay their pension. So, while most of us pay 11% national insurance, most public sector employees pay 9.4%.
Making them pay the same as the rest of us could raise more than £2bn a year. We owe it to future generations to bring this mountainous bill under control.