Pensions & cuts

The Times and Telegraph report that public sector workers could lose huge amounts of pension rights if their jobs are transferred to the private sector. Three quick points:
1. Pensions are only deferred wages. A cut in pensions is therefore a wage cut. If the private sector can only provide a service cheaper than the public sector because it cuts wages, what does this say about the supposedly greater efficiency of the private sector?
2. Final salary pensions are not inherently (pdf) better than defined contribution schemes. There’s no magic money tree that ensures that cash paid into a final salary scheme grows faster than cash paid into a DC scheme. Insofar as final salary schemes are generally more generous that DC schemes, it is only because employers pay more into them.
The issue here is not - or should not really be - final salary vs. DC pensions. It should be level of payments into them.
3. A big reason why pensions are so expensive is simply that annuity rates are nugatory - 3.5% for a 60-year-old man wanting an RPI-linked pension, which means you need pension pot of £571,000 to buy an index-linked pension of £20,000 a year.
However, this could change. A big reason for low annuity rates is that the global savings glut/investment dearth has depressed gilt yields, which have dragged down annuity rates. But this glut mightn’t last. It’s possible that some combination of reduced Chinese savings and increased (US?) government debt might, over the long-run, at least cause real gilt yields to return to their historically normal levels (2-4%). A one percentage point rise in annuity rates would reduce the cost of that £20,000 pension by 22%, to £444,000.
The claim that final salary schemes are unaffordable rests in part on the assumption that annuity rates will remain extraordinarily low - which is a strong assumption.

Comments

[Luis Enrique]

are annuity rates low, or are life expectancies just rising?

which gives me the opportunity to plug a colleagues work:

http://www.amazon.co.uk/Annuity-Markets-Edmund-Cannon/dp/0199216991

[Tim Worstall]

"If the private sector can only provide a service cheaper than the public sector because it cuts wages, what does this say about the supposedly greater efficiency of the private sector?"

Efficiency is defined as the relationship between inputs and outputs. Money is an input.

Therefore the private sector is more efficient *because* it pays its workers less.

[Barbara]

It all indicates that the public sector is more efficient in certain aspects than the private one.

[botogol]

a final salary scheme *guaranteed by the government* is effectively risk-free, and for the employee is therefore MUCH MUCH better than a defined contribution scheme..

[Agog]

"Therefore the private sector is more efficient *because* it pays its workers less."

...assuming the service so provided is at least as good as the alternative. And efficient in quite a paltry sense if it reduces its workers' wellbeing. What price efficiency?

[Luis Enrique]

Tim W

Output=Productivity*Inputs
Cost=Productivity*Inputs*InputsPrice

but you know that. when people talking about how the public sector is less efficient, they are usually asserting the 'productivity term' differs between public and private, not the input prices. This doesn't mean I think input prices are unimportant.

[Mark]

The difference between final salary/defined benefit and defined contribution is that if a DC pot comes up short of expectations, tough, that's what you get. With a DB if the pot comes up short it is made up by the employer or current members still paying in -a ponzi scheme.

this isn't some minor difference, as anyone, like me, who has had his "unaffordable" DB benefit changed into a DC scheme by his employer.

[rosscoe]

"If the private sector can only provide a service cheaper than the public sector because it cuts wages, what does this say about the supposedly greater efficiency of the private sector?"

I think the key word in that phrase is "only" though the payment of less wages is one way that the private sector might greater efficency its not the only way- greater incentives for management to keep costs down and better supervision of mangers spring to mind, though this might be more down to economies of scale...

[CNH]

'If the private sector can only provide a service cheaper than the public sector because it cuts wages, what does this say about the supposedly greater efficiency of the private sector?'

I might be missing something here, but ...
1. The public sector pension scheme has the weight of the state behind it, whereas the private sector scheme can only make its payouts on the basis of received inputs.

2. The state may say: 'You can have a pension scheme of 50% of your salary without having to make any payments at all.' What private sector scheme can compete with that?

[chris]

Gentlemen - DB schemes are NOT risk-free. It's just that the employer/tax-payer bears the risk rather than the worker. The difference between them is about who bears the risk. In aggregate, there's very little in it.
@ Tim - you know you're being silly. Wage cuts are only "efficient" from the partial view of the employer. You might was well say that wage rises are efficient from the viewpoint of the worker. By "efficient" I was thinking of productivity, as any reasonable person would.

[McGazz]

"Therefore the private sector is more efficient *because* it pays its workers less."

And there we have the problem. "Efficient" means "efficient at making money". No other form of efficiency is ever considered.

[Phil]

Is the answer to question 1 "this supposed greater efficiency is a tribal totem which is worshipped for its apparent skill in producing profits for shareholders (which are in fact extracted from employees' wages)"?

[Liam Murray]

"If the private sector can only provide a service cheaper than the public sector because it cuts wages, what does this say about the supposedly greater efficiency of the private sector?"

What am I missing? Replace 'efficiency' in that sentence with productivty (as per your exchange with Tim W) and the answer remains simple & straightforward - 'it says it all'. The same outcome for the public at lest cost to the public fits any ordinary definition of 'more productive' or 'more efficient' I can construct?

[BG]

on 1, this ignores completely the slight issue of pensions funding which are not exactly paid for by the same people in a private an public plan....

[Cliff Tolputt]

I question your use of the word "if" in point one. In the business world employees have to justify their position by adding value to the enterprise, but the cost goes far beyond salary + provision for pensions as I'm sure you well know.

As to efficiency (or productivity) purpose plus quality of management are significant factors though I do wonder about this when it comes to the banking fraternity and their magnificent bonus structures.

[Tim Worstall]

"And there we have the problem. "Efficient" means "efficient at making money". No other form of efficiency is ever considered."

No, greater efficiency is producing more that is valued while consuming less that is valued.

Consuming labout to the value of £90 instead of labour to the value of £100 whiile keeping output constant is increasing efficiency.

Raising output from £100 of value to £200 of value while increasing the consumption of labour from £100 to £150 is similarly increasing efficiency.

[Cliff Tolputt]

Adding to Tim's arguments some workers might consider doing less for more is their form of efficiency, but from a good management point of view the opposite is true (more for less).

Profitability is all about creating a tradeable surplus. Our civilisations are built on that concept. It enables people to specialise but in the knowledge they can trade to a richer and more secure life. From this viewpoint the public worker has an essential place in enabling others to more easily concentrate on generating wealth.

[McGazz]

"No, greater efficiency is producing more that is valued while consuming less that is valued."

You're missing my point. You're looking at efficiency from a purely economic point of view.

What's the point of increasing output relative to labour input if it's done by making the people providing the labour sick or miserable and the people providing the labour aren't seeing any of the benefits of this "efficiency"?

Your view of efficiency is "the person with the buck gets more bang for it", but is a country full of overworked and underpaid workers an efficient one? It isn't in terms of allocation of resources, allocation of workload or on a Gross National Happiness type measurement.

[andrew]

Actually, DB schemes are more efficient at providing a pension than a DC scheme on a pound of pension payable basis.

Unfortunately as noted above, investment risk in a DB scheme is with the employer and if the employer has problems paying, the trustees can effectively take over the company
In a DC scheme, if not enough has been saved, the employee takes the risk.

[ad]

"If the private sector can only provide a service cheaper than the public sector because it cuts wages, what does this say about the supposedly greater efficiency of the private sector?"

The article said no such thing. It merely said that the private sector could provide a service cheaper than the public sector by cutting wages. In other words: public sector workers are overpaid.

At the expense of everybody else.

[RonD]

Let's cut to the chase. Why not take the public sector jobs, switch them to the private sector. Once that system is up and running,send those jobs overseas. Ultimately, we can have school classes of 400 sitting in front of a giant screen listening to a teacher from a third world country. Not only can the kids learn the subject, they can also learn a second language to boot. We are talking about bang for the buck now!

RonD