This book summarises an international seminar held in January 2011 where academic experts discussed the arrangements for public sector employees' pensions in a range of countries. The editor, Noriyuki Takayama, is the director and CEO of the project on intergenerational equity at the Research Institute for Policies on Pensions in Tokyo. The Institute produces a range of international studies on public policy issues, and has produced here another valuable resource on an aspect of pensions that is somewhat neglected in the literature.
In some countries, as the collected papers outline, public sector pensions are paid in addition to other basic state pensions or social insurance pensions. In others, there is some degree of integration and comparability with private sector schemes. Critically, in most countries, there has been a tradition of favoured treatment for pensions for civil servants. The book asks whether this dualism makes sense any more. As the Global Financial Crisis continues to affect sovereign states, and as Defined Benefit (DB) plans in the private sector have struggled, the favoured situation of civil servants has been put under increased scrutiny.
The collection highlights both the fiscal and intergenerational equity implications for states with expensive unfunded promises to civil servants. It also explores the way in which such schemes lack transparency and accountability, often being designed and governed by the very civil servants who are the beneficiaries. Actuarial assessments are rarely made public, or independently assessed, and the implicit costs of such schemes are higher because civil servants often have a different demographic profile than the population as a whole.
In a world of growing inequality, and demographic ageing, state pensions are being reformed. As in Ireland (not unfortunately included in this study), even private pensions in payment may be renegotiated in light of solvency dilemmas. Public sector schemes can no longer expect to be immune, especially not in countries affected by the current Eurozone problems or facing fiscal dilemmas such as in Asia and the U.S.
Detailed examinations of the arrangements in Australia, China, India, Indonesia Malaysia, Singapore, Japan, Korea, the U.K. and U.S. are outlined by respective authors in nine chapters, with a helpful overview of OECD countries by Edward Whitehouse to begin.
For Australia, authors Bateman and Piggott describe an atypical situation where the switch from DB to DC plans for new public sector employees began 20 years ago. Legacy costs are still large but at least will eventually fall to zero as pensioners die off. Other countries, such as China, still face the need for reforms to contain cost and fiscal risks, and countries such as Korea and India have had reforms but still face challenges.
One of the advantages that public servants typically have enjoyed over their private sector counterparts is not only longevity protection, but usually, generous inflation adjustments. In Japan, favourable treatment for civil servants has sparked a ‘pension jealousy debate’ and there have been progressive reforms to reduce the difference.
Concern over both the generosity of final salary plans and the fiscal consequences has driven pension reform discussions in the U.K. Rather than the Australian approach of a shift from DB to DC schemes in which the public sector employee bears more of the risk and in which some prefunding (if not full funding) is feasible, a reduction in the DB formula is the preferred reform approach. A recommendation, for example, has been made for the use of ‘average’ not ‘final’ salaries, and the linking of the age of retirement to the state pension age. By way of contrast, the U.S. public sector schemes are considered to be in a state of evolution rather than in need of radical reform to meet the 21st century's changed conditions.
Little discussed is that these special schemes once provided a useful human resource management tool. For example, by allowing retirement with a generous pension to be mandatory for employees over a certain age, those who otherwise might have held on to jobs past the point at which they were productive could be satisfactorily ‘put out to pasture’. On the other hand, final salary pensions may reduce mobility for those civil servants late in their careers in order for them to maximize their pension advantage. Such ‘holding on’ for pensions might be seen as ‘bad’ for the individual, for taxpayers, and for an efficiently functioning economy. Some quantifications of these effects would have been welcome.
In a modern world where older people are healthy and can contribute in a meaningful way for longer, and where there is a skills shortage, the use of pensions as a human resources tool may not be appropriate any longer. Another missing dimension is any gender or a human rights analysis. Old fashioned public sector schemes treat those with dependents, such as spouses, differently. In the modern world women are more likely to have pensions from working in their own right. Moreover when those with ‘spouses’ receive implicitly more than those without, deciding who is a spouse with today's fluid and multiple relationships poses some real equity issues.
Some may believe that pension promises can be completely relied on only if a sufficient pool of assets is set aside to meet the promises accrued while each employee is working. Whitehouse reflects the dilemma that governments face: if they contribute directly to the pension pot the government is ‘simply paying money to itself’. While this might reduce the deficit in its pension plans, it does not have an overall effect on the economic position of the government. It is as Whitehouse correctly says ‘an exercise in relabeling’.
It is a pity then that we did not have a more critical analysis of the Future Fund in Australia, set up to fund the unfunded liabilities of civil servants' pensions legacy costs. Beside the ‘fiscal illusion’ aspect of the fund, there may be inherent risks in funding, especially if investments turn out badly.
Unanswered is the question of why state employers should offer subsidised pension schemes of any kind over and above what other employees get? The equivalent cost of such schemes could be treated as part of salary and employees allowed to decide whether (and how) to save that amount for retirement. Shifting all current employees to a ‘total remuneration’ approach to pay would stop the accrual of further problems and would make current compensation arrangements fairer, more transparent and flexible.
