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Public sector pay and pensions

Explore the trends in public sector pay and pensions, including the government's decision to slow pay growth, the impact on inflation, and the differences between public and private sector remuneration. Learn about the role of pay review bodies, the growth of public pension liabilities, and the implications for monetary policy.

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Public sector pay and pensions

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  1. Public sector pay and pensions Antoine Bozio and Paul Johnson Institute for Fiscal Studies

  2. A topical issue • Public sector pay amounts to £161 billion • The Government has decided to slow public sector pay growth • It claims that to do so is important in controlling inflation • It has “staged” recommendations by independent Pay Review Bodies for nurses and police

  3. More police on the streets… Source: BBC

  4. Outline • Public sector pay trends • Public sector pay levels • Public sector pensions • Pay review bodies • Inflation and public pay

  5. General Government’s pay bill

  6. Noticeable increase since 1999

  7. Public sector bill since 1997 • Increase in pay bill from 11.5% to 12.4% of national income in 1997-2006 • Increase in the size of the workforce: +13% From 5.1 million to 5.8 million public sector workers +28% in NHS +24% in education +20% in the police

  8. Pay trends since 1997

  9. Pay trends since 1997

  10. Pay trends since 1997

  11. A diverse experience Public average= 47%

  12. Public sector pay levels • Remuneration should be able to attract and retain workers in the public sector • Recruitment problems experienced in 2000-2001 • No evidence of similar issues now

  13. Vacancy rate of teachers in England and Wales

  14. Public sector pay levels • Limited evidence of the need for catch-up pay increases • No reasons to want a return to the 2000 situation • Specific issues remain unresolved • Regional issues • Public pensions

  15. Regional differences

  16. Regional differences

  17. Vacancy rate of teachers

  18. Public sector pensions • Public sector pensions have been a big issue in recent years • Pay and pensions should be considered as a whole in the remuneration package of public sector workers • Need to analyse both elements to compare public and private remunerations

  19. Public sector pensions • More generous pensions in the public sector • Membership: 76% in “final salary” schemes in the public against 17 % in the private sector. • Value: public pensions worth 25% of annual salary against 20% in the private sector • To compare public and private sector wages one needs to add 12% to public sector wages • Public/private differential has been growing • Dramatic reduction in private sector coverage

  20. Public pension liabilities

  21. Public pension liabilities

  22. Why increased liabilities? • Technical change (discount rates) • Life expectancy has been underestimated • Increases in public pay higher than assumed • Increases in the number of public sector workers • Despite recent pension reforms (increase in normal age for new members)

  23. Pay Review Body process • Independent bodies make recommendations for 40% of the public sector • Some groups do not have the right to strike (police, army, prison officers) • Other groups (teachers and nurses) are very politically sensitive • Government makes the ultimate decision

  24. 1.9% public sector pay growth to limit inflation • The Government argues that lower public pay growth is needed to control inflation “The Government has demonstrated its commitment to [the credibility of UK’s monetary policy] by delivering overall headline awards for Pay Review Body groups in 2007-08 that average 1.9%. […] it is therefore important that public sector pay settlements continue to be consistent with the achievement of the Government’s inflation target of 2 per cent”

  25. “Staging” but not saving much • The Government has “staged” pay awards for nurses and the police • Staging represents a small one-off savings • Police, nurses and prison officers: +1.9% • Scottish and Welsh police and Scottish nurses: +2.5% • Armed Forces: +3.3% • Average weighted increase: +2.24% • Excluding Wales, Scotland and teachers: +2.08% • Contrast with the long-term cost of public sector pensions

  26. Inflation and public sector pay • Mervyn King’s 1998 speech on “Inflation and labour market”: “[We don’t] think earnings growth causes inflation – inflation is a monetary phenomenon. Rather it is because sustained earnings growth much above or below these rates [4%] may indicate that the level of utilisation in the labour market has reached a level inconsistent with the inflation target.”

  27. Public pay increase consistent with inflation • 2% inflation target does not necessarily imply 2% pay increase. • With 2% productivity growth, 4% average earnings is consistent with the inflation target Ed Balls when awarding 2.45% to teachers in 2008-09: “What the Prime Minister said was that going forward public sector pay increases must be consistent with keeping inflation at 2%. […] He didn’t say public sector pay would have to be 2%.”

  28. Impact of pay drift • Need to account for the difference between earnings growth and headline increases • “pay drift” occurs when average pay would increase even with a 0% award • Not to be confused with incremental pay scale • Department’s estimates have been very unreliable • These imply headline increases consistent with inflation target are above 1.9% • 3.8% for teachers • 2.4% for nurses • Need more for better and more transparent estimates

  29. Conclusions • Since 1999 public sector pay has been catching up with private sector earnings • Government says it wants to limit pay growth in the public sector to control inflation • No evidence that PRB recommendations were close to being inflationary • There are arguments for greater variation in regional pay awards

  30. Conclusions • Trade-off when remunerating public sector workers between pay and pensions • No strong argument for favouring pensions over pay • Government should refocus its cost cutting energy towards public sector pensions • Data on public pay, estimation of pay drift or computations of pension liabilities deficient

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