Public v Private

The threat by Scott Walker, the governor of Wisconsin in the US, to end collective bargaining arrangements with public sector workers in that state is the nastiest move yet by the ‘free market’ Republicans as a response to the slump in US capitalism.  The governor is trying to portray the very victims of the banking collapse and the subsequent Great Recession as the villains.  For him, the crisis was not the fault of reckless bankers, a corrupt financial sector and their grotesquely overpaid executives, but the fault of teachers, health workers, refuse cleaners and other public servants who are paid too much!

The governor not only wants public sector workers to take huge cuts in their pay and conditions but also to lose their rights even to negotiate with their employers.  In a policy designed to divide workers in the private sector from those working in the public sector, he deliberately excludes the police and firefighters from his draconian laws.  He knows there is too much sympathy for them.  But he gambles that other public sector workers will be seen as ‘fat cats’ who are paid more and have better conditions than workers in the private sector and so should ‘suffer more’ under these programmes of ‘fiscal austerity’.

In reality of course, the governor is not trying to ‘save money’ or get public sector workers to ‘pay their share’ with this move, he just wants to break the last bastion of trade unionism in the US, the public sector, which has 36% of workers in a union compared to under 10% in the private sector.

The claim that public sector workers have better pay and conditions (particularly pensions) in the US or the UK is a myth.  It is a myth perpetuated for the purpose of breaking the opposition of employees to the cuts in employment and wages that the politicians of US states, the federal government and for that matter, the UK government are now imposing.

There is a range of studies that show public sector wages in the US are simply higher than wages in the private sector because there are more skilled jobs in the former that require more qualifications, like teaching.  By including the wages of young people working in McDonalds or Starbucks or as immigrants as office cleaners and the unskilled in WalMart, the average for private sector pay will be lower than a teacher’s salary.  A fairer measure of apples and apples would be to compare the salary of a lecturer in a state university against an economist or scientist working in bank or pharma company.  Then the story is very different.

And as for pensions, sure we can find examples of highly paid public sector workers with huge pension entitlements.  But that is the same story for bankers and senior executives in big corporations.   In the UK, we know about the large salaries and pension pots that the top chief executives in local governments, various semi-government agencies or quangos and some health service managers, school head teachers and civil servants ‘earn’.

But they do not reflect the reality for the vast majority of public sector workers. Indeed, public sector pensions in the UK are the lowest relative to earnings in the OECD!   The replacement rate (value of pension payout to income) is just 31% in Britain compared 39% in the US and 59% for the OECD as a whole.   The average pension payment in local government is just £4000 a year, in the civil service it is £6000 a year and in the NHS, £7000 a year.  The average across all public sector schemes is just £6200 a year.  And the average public sector pensioner receives only slightly more than minimum income standard in retirement, according to the Joseph Rowntree Foundation.

And public pension schemes are not more generous than private ones.  The average payout in public pension schemes was 33% of pensionable pay while it was 32% in private sector schemes.  The total contributions in public pension schemes from employers and employees was about 21% of pensionable pay, the same as in the private sector.  Indeed, contributions are much higher in the fire, police and armed forces.  Already raising the pensionable age and moving from ‘final salary to career average’ payouts has reduced the value of public sector pensions by 25%!  Firefighters have seen the value of their pension payouts fall from 35% of pay to 24%.

Yet, the government and their ‘experts’ say that public pension schemes are becoming too costly and must be reduced.  The argument is that, as they are ‘unfunded’ i.e. not invested in financial markets, so the taxpayer has to make up the difference in costs after employee and employer contributions.  The cost to the taxpayer is forecast by the UK government to rise from £4bn a year now to £10bn by 2016.

But the main reason for this growing deficit is not because public sector pensioners are paid too much or public sector workers contribute too little.  It is because 3m employees have left the public sector since 1991 due to privatisation and cuts in services, a fall of 45%.  With the coalition’s pay freeze and planned further reductions in the public sector workforce, pension contributions will fall further behind the growth in the cost of the pension payouts.  Indeed 44% of the rise in the gap to 2016 is due to this.  Just a 15% increase in the number of public sector workers (rather than a reduction) contributing to the schemes would close that gap.

The UK spends just 5.7% of GDP on pensions (state, public and private) compared with 7.2% in the OECD.  And yet we have 27% of the UK working population aged over 65 compared to 24% in the OECD.  Britain’s pensioners have the fourth-highest level of poverty in Europe, worse off even than Romanian and Polish pensioners in relative poverty terms.  Nearly one in three British pensioners are ‘at risk of poverty’ compared with just 19% for the EU average.

And now we have found out that because the UK’s national statistics office got its sums wrong, the UK inflation rate has been underestimated for over ten years, thus reducing the indexed payments to pensioners in the public sector.  On top of that, the government is going further by making these payments benchmarked against the consumer price index, which is much lower than the older retail price index that includes the cost of mortgages.  So pensions will lag behind prices even more.

The UK government is introducing a compulsory contribution scheme on all employees (private and public) of 4% of pay.  This will be given over to private pension fund managers to invest.  But it was the financial crisis that was the main cause of the growing deficits in public (and private) pension schemes.  The financial collapse led to losses or lower returns in ‘funded’ schemes that are invested heavily in the stock market.  Of Britain’s private and public sector ‘funded’ schemes, 60% are invested in the stock market compared with only 36% in the OECD average.  This is what has ruined funded schemes: their returns depend on the vagaries of the stock and bond markets.

Moreover, unfunded schemes (paid for out of general taxation) are much cheaper to administer than funded schemes, public or private.  In the private sector, it costs £41-47 per member per year to administer a scheme (ie pay fees to managers). In unfunded public schemes, it is as low as £7 a member.  Because local government schemes are invested through pension fund managers too, they cost £360m a year in fees.

And then there is the state pension.  There is no need to raise the retirement age, reduce the value of pensions or raise contributions, if the UK or US economy grew fast enough to meet the rise in the numbers of older people.  For example, if the growth rate of UK economy’s productivity per worker were raised by 1% pt a year from its current level, that would deliver enough pension contributions to allow for a 50% rise in the state pension without raising its cost as a share of GDP.

Even the recent Turner report on UK pensions admitted that the cheapest, most equitable and effective pension scheme would be a universal taxation-funded state pension for all without means testing and doing away with costly private pension fund managers. In contrast, under the ‘free market’ nothing comes as a right, as the public sector workers in Wisconsin are finding.  It only comes through the vagaries of supply and demand.  Advocating the right to negotiate or the right to a decent pension encroaches on the mechanism of the market.   It is the market that stops workers in the private and public sectors gaining decent wages, conditions and pensions.  Losing the right to negotiate will hurt private sector workers as much as public sector employees.

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