The solution is to cut public sector pensions

There is always a well-known solution to every human problem—neat, plausible, and politically impossible. This should not stop us, as with the laddie and the new clothes, pointing it out.

No doubt nurses and teachers will be even more determined to strike later this week when they see how the pay gap between the public and private sectors persists in the latest official figures.

The Office for National Statistics said private sector pay increased by 7.2%, before adjusting for inflation, while the equivalent figure for the public sector was a meagre rise of 3.3% in the three months to the end of November.

With inflation running at 10.7% in the penultimate month of the year, it is not difficult to see why so many nurses and teachers have found themselves struggling to pay food and energy bills, while an increasing number queue at a food bank.

It’s possible to go back and have a look at the numbers for public versus private sector pay. ASHE at the ONS is the source, open to anyone who can wrestle a spreadsheet. In 1997 public sector pay was some 101% of private. In 2010 115.8%, Last year, 2022, 115%. So forgive us if we don’t weep too much for the downtrodden public servants.

Of course, these numbers do not take account of the different skills, seniority and responsibility mixes in the jobs done - but all those figures suffer from that same problem so they are still comparable. The other thing they don’t account for - because they are the raw wages figures - are the details of further compensation. Job security, differences in sick and maternity pay perhaps and the biggie, pensions.

Meanwhile, other public sector staff are taking industrial action – ambulance drivers, nurses and rail workers – with others also threatening to walk out.

The NEU argues strikes are about maintaining teachers’ real pay against the background of double-digit inflation. It calculates teachers have suffered a 23pc pay cut in real terms since 2010. The union says: “This is not about a pay rise but correcting historic real-terms pay cuts”.

But the NEU’s headline figures do not tell the whole story, because they ignore the value of the “deferred salary” teachers earn through their generous defined benefit pensions, a guaranteed inflation-linked pension for life, based on salary and years worked – a major part of total public sector pay.

The annual cost to taxpayers of new public sector pensions – calculated just like private sector pensions – are published in individual pension scheme accounts.

The Teachers Pension Scheme accounts show that from 2010 to 2022 the annual cost to taxpayers of pensions, after teachers’ own contributions, shot up from 15.5pc to 67pc of salary – two thirds of salary – largely because of lower real interest rates.

Adding pensions to salary to get total pay paints a very different picture – rather than a 23pc fall in real terms, teachers' total pay and pensions has gone up by 10pc.

At which point a little theory. The aim of a pension is to accord with the lifetime income hypothesis, which assumes that we’d like to smooth our incomes. We work for 30 to 40 years, we live for perhaps 80. Rather than feast in our working years then starve we save some of that working life income to pay for the Golden Years. The theory can be extended to our borrowing before working wages arrive then paying off the loans when they do. We smooth that total working compensation over all of our living years that is.

This is true whether we call it paying taxes to gain access to welfare, making pension contributions to gain an annuity or taking out student loans. We smooth a working life’s income over all of life. It’s possible to argue with the details of this, but the base idea is obviously true.

One of those details is that an assumption is made - we’d like to have largely the same consumption possibilities over that lifetime which the working years must pay for. That might not be wholly true - consumption desires among the over-90s might be rather lower than among the sprightly 70 year olds. Fewer cruises and skydiving adventures desired perhaps - possibly offset by care costs, possibly not. But details - the base idea of smoothing is clearly true.

So, what actually is the complaint being made here? Among those teachers, public servants in general, too much of their working compensation is in delayed wages - those pensions - and not enough in current wages. The solution is therefore obvious. Cut the pensions to pay more in current wages.

Neat, plausible, and politically impossible.

In a well accounted for world those future pensions would be part of the national debt. For they are promises of future bounty from the nation’s government. For near all of them there is no fund, no pot of capital - they are simply a claim upon future tax revenues, where there is a notional fund the fallback is still tax revenues. We are not in a well accounted for world. Those pension liabilities are off the books in a manner that a corporation would be closed down and bankrupted for trying.

Therefore, while raising wages now and lowering wages then should have no effect upon the government accounts - if they were properly kept - they would in fact have an effect - because those government accounts are not properly kept.

It is still the correct solution though. Cut public sector pensions to raise public sector pay. Unless, of course, once we’ve included the value of those pensions into those public sector pay packets we just decide to cut them anyway.