Dr Bob Swarup, Partner at Pension Corporation, comments on data from the Office for Budget Responsibility on the extent of public sector liabilities.
“Previous publications, including the Policy Exchange paper on public sector pensions, have already floated the idea that the public sector liability is around £1 trillion or so. So there’s nothing new there and in any case, I am sure that the number has been analysed ad infinitum by others
“What I am pleased by is the detail. The main objective should be to increase the transparency of government statistics, in particular those to do with public sector (net) liabilities, and to develop tools to better assess the long-term sustainability of the public finances and the degree of fairness of government policies across the generations.
“Coming out of the deepest recession in living memory, it is certainly an opportune time to revisit these issues and it is increasingly important as we see the flood of baby boomers beginning to retire. Bear in mind that pensions is but one of the three major costs associated with the elderly for the government – long-term care and healthcare are two other equally important legs of the stool.
“However, we still need a broader approach than that currently used to assess better the true state of the public sector finances. There are many other important liabilities the government might face. And equally, there are many non-financial assets the government holds that will help meet these liabilities in the future.
“Some of the liabilities have been captured (PFI projects, for example), but there are other important liabilities arising from social / moral commitments that are not. The state pension is a prime example. An even wider assessment of the public finances could thus include all future government spending, which citizens might expect – based on current policies - to benefit from in the future. To balance this, such an assessment should then also include all the taxes citizens might expect to pay in the future. It should also include non-financial government assets such as social housing and physical infrastructure.
“Intriguingly, some people, such as Martin Weale and Professor James Sefton, have tried to use an approach called generational accounting to look at this. Assuming current spending and tax policies (and individual behaviours) remain unchanged forever, they have projected all government spending and revenue into the future. The numbers are stark. With the population ageing rapidly, the share of pension and health spending in GDP will rise strongly over the coming decades. Their numbers, though based on 2008, indicated that the fiscal position would have to be tightened by around 10 per cent of GDP to ensure long-term solvency.
“But even this tightening is not sufficient to make future generations equally well off. Someone born today will get a better deal out of the welfare state than someone born in, say, 20 years’ time. Even more tightening would be required to achieve inter-generational fairness. One of my colleagues, Frank Eich, also did an excellent paper on inter-generational fairness in the context of public sector pensions, which can be found on Pensionomics.com. This generational accounting is a useful “what if” exercise, which can alert policy makers of the challenges ahead.
“This suggests that the UK’s public finances are in their current state neither sustainable nor inter-generationally fair. While the former merely confirms what we knew already, the latter adds an important dimension to the debate. We are not doomed yet but policy action and most likely changes in individual behaviours (for example, remaining in the labour market for longer where possible) are required to achieve sustainable outcomes in the long term. Now is the time for action. This is the true challenge for this and future governments.”
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