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In the interim report of the Independent Public Service Pensions Commission, published this morning, Lord Hutton argues for an increase employee contributions (with the exception of those in the armed forces) with longer-term reform recommendations to follow in next year's final report. Even though the report's projections (chart 4.B) suggest that the current arrangements are affordable in the sense that pension payments are set to fall as a share of national income over the next fifty years, the case for further reform appears strong.
The short-term recommendation is for an increase in the amount that members of public service pension schemes have to contribute. Should the coalition Government concur, this could make a useful contribution towards the cuts to spending to be set out in the Spending Review on October 20th. Last year Ireland chose to do something similar with the introduction of a "pension levy" as part of their fiscal tightening. Today's report estimates (paragraph 8.15) that an across the board increase in employee contributions of one per cent of earnings would raise £1 billion, which is the same amount as intended to be saved by the planned cut to child benefit for higher rate taxpayers (announced by Chancellor George Osborne on Monday). Increasing contributions would be very similar to a cut in public sector pay, although it might help provide a better guide to members of the value of the pensions they are accruing. Lord Hutton's report does not indicate how large any increase in contributions should be, instead leaving this decision to the Government.
Today's report does not detail Lord Hutton's recommendations for more fundamental reform to public-service pensions; these will follow in his final report to be published before next spring's Budget. Any such recommendations should consider how cost effectively public service pensions fulfil the role of attracting and retaining the desired calibre of staff in the public sector. In addition to these issues, Lord Hutton has also said that he will consider whether the pensions provide an adequate level of retirement income and whether the distribution of contributions and benefits is "fair". The following features of the current schemes are difficult to justify and reform could potentially enhance value for money for the taxpayer:
Pension cuts could either be made in such a way as to maintain their average generosity to members or in a way that reduced the overall generosity.
An example of a possible improvement to the structure of defined benefit pensions that could retain the average generosity would be a shift from final salary to career average earnings and an equalisation of NPAs with the SPA, combined with an offsetting increase in accrual rates. Alternatively, compensation for pension cuts could be provided through pay increases. Unfortunately this latter option might prove unattractive in the current circumstances: the unfunded nature of most public-service pension schemes (the most notable exception being the Local Government Pension Scheme) means that pension cuts leads to lower spending (and therefore borrowing) in the future, while increases in public sector pay would increase spending (and therefore borrowing) immediately.
Only pension cuts without full compensation would strengthen the public finances. But this would require the judgment that not only was the structure of public-sector pensions inappropriate but also that the total remuneration package on offer (pay and pensions) was unnecessarily generous to attract and retain the requisite public sector workers. Addressing what level of compensation for any pension cuts is appropriate will be one of the most important and difficult questions Lord Hutton should address in his final report.
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Cutting the deficit: three years down, five to go?
The UK is in the fourth year of a planned eight-year fiscal tightening. Following further announcements made in Budget 2013, this fiscal consolidation is now forecast to total £143 billion by 2017–18. The UK is intending the fourth largest fiscal consolidation among the 29 advanced economies for which comparable data are available. By the end of this financial year, half of the total consolidation is expected to have been implemented. However, within this tax increases and cuts to investment spending have been relatively front-loaded, while cuts to welfare spending and other non-investment spending have been relatively back-loaded.
The March Budget forecast that borrowing would fall by £0.1 billion from £121.0 billion in 2011–12 to £120.9 billion in 2012–13. On Tuesday, the Office for National Statistics is due to release its first estimate of public sector net borrowing in March 2013 and, therefore, for the whole of 2012–13. Borrowing could easily end up being higher or lower than it was in the previous year, either due to backwards revisions, the uncertainty inherent in forecasting borrowing even a month in advance, or both. However, whether borrowing is slightly up or down in cash terms is economically irrelevant. Either way, the bigger picture is that having fallen by roughly a quarter between 2009–10 and 2011–12, borrowing is forecast to be broadly constant through to 2013–14.
Women working in their sixties: why have employment rates been rising?
Employment rates through the recession have been remarkably robust, with today’s ONS figures showing employment remaining close to 30 million. The young have experienced historically low employment rates and high unemployment rates but the employment rate of women aged 60 to 64 has increased as fast since 2010 as it did during the 2000s. An important explanation is the gradual increase in the state pension age for women since 2010, which has led to more older women being in paid work. Without this policy change, the employment rate for 60 to 64 year women would have been broadly flat since 2010.