The old tribal war drums have been banging over the Government's announcement that it intends to overhaul the pensions paid to teachers, nurses, police, firemen, civil servants and local government workers, not to mention judges. Some union leaders have immediately warned of dire consequences if an axe is taken to state employees' retirement funds.
This kind of talk is unhelpful. Reform of pensions is nothing to do with what some union leaders describe as Tory cuts to reduce the current budget deficit. The coalition has tried to signal that by appointing a former Labour pensions secretary, John Hutton, to chair the new pensions commission. This is about addressing a long-term structural problem. Most of us are living longer and the cost of public pensions – which come out of this year's taxes not some previous pot of savings – is soaring.
Public sector pensions have 11 million members. The collected liability for those is £770bn, though some say it is closer to £1 trillion. That liability is increasing by £26bn a year, which is about 2 per cent of GDP. This is serious money. And life expectancy is rising. No one receiving a public pension will have it cut. But those who are still in public employ are paying just 5 or 6 per cent of their salary in pension contributions. A private sector employee would have to put in more than a third of their salary to accrue similar benefits. A 25-year-old who wants a pension of £25,000 a year needs to save £322 a month. It will cost £1,017 a month if you are 45. To take the required sums from current taxation income is not possible.
The options then are broadly these: to close such schemes to new entrants, as has happened for years in the private sector; to close schemes to contributions; or to ask public employees to raise their contributions to around 7.5 per cent of their monthly salary. But pensions are a complicated business which is why a full and rigorous commission is needed. And they are too important for all sides to take a head-banging stance.
Co-operative and construction engagement is needed from all involved. There are signs of that if you look beyond John Prescott's Old Labour rhetoric. Pension contributions by council workers had already risen on average from 5.5 per cent to 6.4 per cent of salary. Our collective future in our old age is at stake here. Everyone needs to desist from cheap political point-scoring.