Dominic Lawson: You think a Greece can't happen here? Wrong ...

State-sector pensions cost £32bn a year – more than the police, prisons and courts combined

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The Independent Online

Whatever the joys of its climate and the glories of its ancient culture, most of us would not wish to emulate the Greek experience. We may not be enjoying the sluggish state of our own economy, but at least we do not have mass industrial action, organised by the public sector in defence of outrageous privileges granted by a corrupt or cowardly political class, who mortgaged the nation's future by borrowing vast sums to buy the votes of client interest groups. On second thoughts...

It is true that we do not have a state-owned rail system so indulged that it would be cheaper to pay for all the passengers to take taxis instead. It is true that our public-sector employees are not given 14 months' pay for a year's work, or have ministries in which only half the staff turn up, while moonlighting in the black economy. Those are peculiarly the excesses of the Greek public sector, for which the Germans show an unsurprising reluctance to subsidise through full European fiscal union (as suggested, amazingly, by George Osborne).

The Germans' irritation is especially acute in the matter of pensions. When the Greeks took to the streets to protest against proposals that the cost of their pensions should be restrained, the Frankfurte Allgemeine Zeitung thundered: "The Greeks go onto the streets to protest against the increase in the pension age from 61 to 63. Does that mean that the Germans should in future extend [our] working age from 67 to 69 so that the Greeks can enjoy their retirement [rights]?"

In Britain, though mercifully free of the consequences of currency union with Europe, we have our very own version of the German-Greek pensions war. In ours, the part of the Germans is played by the private sector, and that of the Greeks – naturally – by the public sector. While the latter, which of course includes Members of Parliament, enjoys defined taxpayer-funded benefits guaranteed against the ravages of either inflation or the stock market, barely a third of all private-sector workers have an employer-sponsored scheme at all (let alone one that offers the gilt-edged index-linking of the state's scheme).

Against a background of greatly increased life expectancy – a good thing in itself – and a significant increase in both the pay and number of public-sector employees, it was hardly surprising that the cost of public-sector pensions rose by a third over the past decade to £32bn a year. That alone is more than is spent annually on, for example, the police, prison service and courts combined – and most of that extra cost has been met by the taxpayer, rather than increased rate of contributions from those who directly benefit.

The Public and Commercial Services Union protests that its relatively low-paid members get, on average, a pension of £6,000 a year. Yet an index-linked joint annuity producing such a sum would today cost £200,000 if purchased on the open market. Meanwhile, the average private-sector worker has a defined contribution pot of £30,000 on retirement, which at the age of 60 would buy him and his spouse an index-linked joint annuity of... £900; and all the while, they would be paying through their taxes to fund the much higher pensions of their public sector equivalents.

Of course, the state employees pay tax, too, but this is a peculiarly circular accounting process since their entire salary already comes out of the pot of general taxation. When last year the new Coalition government sought to implement proposals by the Labour peer Lord (John) Hutton to reduce the burden of these costs – which in conventional accounting terms are completely unfunded – the public-sector unions took industrial action and promised an unprecedented series of co-ordinated strikes across the services for which the public pays its taxes.

To the surprise, I suspect, of the unions themselves, the government last week significantly sweetened the terms of its offer. Perhaps it really was scared of the prospect of the "day of action" planned for 30 November, fearing that the international markets would regard such disturbances as a portent of Greek-style ungovernableness.

Whatever the reason, the Chief Secretary to the Treasury, Danny Alexander, was not kidding when he described the new offer as "generous". He is effectively guaranteeing that the public-sector pensions will still be equivalent to a bonus of about 30 per cent on top of salaries which are already slightly higher than those of similarly qualified workers in the private sector. The lower-paid of all ages and lengths of service will not be any worse off – and some will be better off – than they are under the pre-existing system; and all public officials, including the most highly paid civil servants, with 10 years or less before retirement, will see no adverse change in the time when they can retire, or the amount they will receive.

The funding sums, therefore, are still ones to arouse amazement in those who pay for their own pensions: thus (if the Treasury's sums are correct) a civil servant on a final salary of £29,800 will have a pension worth £24,300 a year, which would require an individual "pot" of no less than £650,000 – to be met by future taxpayers. Multiply that by millions and you begin to see an emerging Greek-style problem (both social and financial).

As Dr Ros Altmann, the Director General of the Saga Group, told me yesterday: "Danny Alexander says that this deal offers certainty and fairness to both public-sector workers and taxpayers. This deal offers neither certainty not fairness to taxpayers. It is a one-way bet for public-sector workers. The government says it will ensure that 'they can continue to receive pensions that are significantly more generous than their private-sector equivalents'. How is that fair to private-sector workers? By specifying that this is a 25-year agreement, taxpayers are even more exposed to risk than they were under the old system."

Dr Altmann, with the battle scars from having been a pensions adviser at 10 Downing Street under New Labour, points out that this scheme has been "controlled and compiled by the Government Actuary's Department, whose staff are in the civil service pension scheme – there is an obvious conflict of interest."

This is exactly the charge levelled against the Greek public sector at the very top – that it has been entirely self-dealing. The biggest victims are the young, who will have to pay the debts incurred in the political pay-offs and capitulations of an earlier generation.