Public Service Costs - The Elephant in the Room


#1924

Bolded text - a nice way of saying that millennials will pay for the generous pensions of their parents and never get to enjoy them themselves? (Not your point, I know, but I can’t bear to see a conversation like this pass without pointing out that the “solution” to the poorly funded public pension schemes is basically to shaft millennials).


#1925

Of this what should the employer contribute on something approximating a fair basis?


#1926

For public servants you also have to factor in the 1.5 times final salary value lump sum (also tax free) on retirement.

I ran some calculations for a range of PS salaries. Basically if you assume a 2% real return then the current system is actuarially neutral. At 1% or less - more or less equal to current long term real bond yields - it is clearly not. At this level there is a ‘gap’ of about 5% of total salary.

Anyway, these assumptions are far more sensitive to real returns than they are to contributions. And over 40 years no one has a clue how investment returns will perform.


#1927

My simple (and I think equitable) solution to this is that employees in the civil service should receive defined benefit pensions reflecting their salary up to some limit ( I think something around 50k would be fair). Above this amount they can contribute to defined contribution schemes of their own choosing.

Persons in receipt of multiple state pensions will be subject to a limit that equates to this.

The issue with widows pensions should be addressed for people recruited after the ban on married women in the civil service.


#1928

I don’t know what fair means in that context.


#1929

I suppose 0% employer contribution seems wrong. Beyond that I have no idea. Is 50:50 right? Is there any reasonable argument as to where the split should lie.


#1930

It really doesn’t matter who ‘pays’ the contribution. That’s just optics. In the long run after-tax wages will adjust.

Tax incidence is something many very clever people don’t get.


#1931

In the long run a company will operate where it can pay the least for a required service. Clever people know that. Tough being clever, or cleverer than the clever.


#1932

Sure, but “pay the least” includes all factors, including corporate taxes.

Ireland has persistently higher costs than the UK, excluding corporation tax. Pretty much all input costs are higher. Rents, labour, raw materials, insurance (don’t get me started on professional indemnity insurance differentials). Is this purely a corp tax issue? I don’t know.

To me, the theoretically best approach to public sector pay is proper up-and-down benchmarking against the private sector, done empirically based on labour supply (ability to attract staff). The reason being that the country is best served by talented people being spread evenly across public and private sector. That would require an order of magnitude more flexibility than currently exists in the public sector and it might be impossible to implement without it being corrupted to the point of being counterproductive (e.g. 2000s benchmarking)

Union influence will always benefit the statistical majority, which is why the lowest paid public servants currently get the best deal relative to their private sector equivalents - there are more of them.


#1933

That does not apply in a public sector context though. It’s clever all the way down.


#1934

Is that true, though? I think ‘talented’ people are uniquely damaging to the professions they’re in. They set new and impossible benchmarks. They change things systems and practices that sort of work for systems and practices that would be brilliant if everyone was talented. They make a pig of it for everyone else.

Recently, I’ve come to believe that mediocrity is an ideal, particularly in public life. When I next vote, it’ll be for the most average, middle of the road stuffed shirt - an empty vessel entirely void of original thought. Their purpose is to leaven the ‘talented’ and water down good ideas…


#1935

I thought the gap was supposed to be closing!

Report says public staff earn 40% above those in private sector
Davy report says difference does not take into account pension entitlements
irishtimes.com/business/econ … -1.3025373


#1936

The CSO view is at cso.ie/en/media/csoie/newsevents/documents/pressreleases/2017/prEAADS2017.pdf


#1937

The CSO put their results and methodology on their website.

Davy restrict it to their private clients :angry:


#1938

The fourth estate prefer the look of Davy’s (Conal McCoille’s) jib!


#1939

Print journalism is a badly-paid profession where you get to rub shoulders with the well paid.

It is also in a slow, but structural, decline.

As a result, hacks are very prone to envy.


#1940

It is very simple

What they said in 2012

per.gov.ie/en/review-of-publ … or-review/

From the article previously linked

And on the allowances, not much looked at since 2012 and delivered in such a way as to make it almost impossible to comprehend:

thejournal.ie/public-service … 6-Jul2012/

An an update since then, Paschal Donohoe, being the cunt that he is:

Meaningful and informative Dail answer. Asshole.

kildarestreet.com/wrans/?id … 9-16a.2558


#1941

The issue of pension calculations over time is problematic because of issues such as return rates over time and its variability.

The issue is moot for public service pensions because there is no fund to which contributions are transferred. Pensions are paid from taxation.

Public service pension calculations are further complicated because of differing contribution rates over time, especially with the additional levy for the last 8 years after the Financial Emergency Measures in the Public Interest (FEMPI) Act 2009.

However, to illustrate the scope of the problem, this is a simple but accurate example.

This is for a male civil servant who works for 40 years before retirement, pays 4.5% pension contribution, starts at an equivalent salary of €10,000 and a final salary due to promotions, salary increases and increments of €70,000, lives for 20 years after retirement and has a spouse that lives a further five years after he dies. He receives a lump sum of 1.5 times his final salary on retirement and a pension of half his final salary. His pension is linked to the maximum of the final grade he was at when he retired. His surviving spouse receives a pension of half that of her husband for as long as she lives.

I have assumed a notional long-term return rate of 5%.

I have assumed that pension contributions are collected one month in arrears. So in the year of contribution one twelfth is invested for 11 months, one twelfth is invested for 10 months and so on.

Similarly, when the fund is being reduced by pension payments, it is reduced by one twelfth every month and the remaining fund remains invested.

The calculations under these assumptions are:

Year                 Salary    Contribution            Fund
1                    €10,000         €450.00         €460.46
2                    €11,538         €519.23       €1,014.78
3                    €13,077         €588.46       €1,667.65
4                    €14,615         €657.69       €2,424.01
5                    €16,154         €726.92       €3,289.03
6                    €17,692         €796.15       €4,268.13
7                    €19,231         €865.38       €5,367.03
8                    €20,769         €934.62       €6,591.72
9                    €22,308       €1,003.85       €7,948.48
10                   €23,846       €1,073.08       €9,443.91
11                   €25,385       €1,142.31      €11,084.96
12                   €26,923       €1,211.54      €12,878.90
13                   €28,462       €1,280.77      €14,833.38
14                   €30,000       €1,350.00      €16,956.42
15                   €31,538       €1,419.23      €19,256.45
16                   €33,077       €1,488.46      €21,742.33
17                   €34,615       €1,557.69      €24,423.33
18                   €36,154       €1,626.92      €27,309.23
19                   €37,692       €1,696.15      €30,410.26
20                   €39,231       €1,765.38      €33,737.18
21                   €40,769       €1,834.62      €37,301.29
22                   €42,308       €1,903.85      €41,114.44
23                   €43,846       €1,973.08      €45,189.09
24                   €45,385       €2,042.31      €49,538.31
25                   €46,923       €2,111.54      €54,175.83
26                   €48,462       €2,180.77      €59,116.07
27                   €50,000       €2,250.00      €64,374.16
28                   €51,538       €2,319.23      €69,965.99
29                   €53,077       €2,388.46      €75,908.25
30                   €54,615       €2,457.69      €82,218.47
31                   €56,154       €2,526.92      €88,915.04
32                   €57,692       €2,596.15      €96,017.27
33                   €59,231       €2,665.38     €103,545.46
34                   €60,769       €2,734.62     €111,520.89
35                   €62,308       €2,803.85     €119,965.94
36                   €63,846       €2,873.08     €128,904.08
37                   €65,385       €2,942.31     €138,359.96
38                   €66,923       €3,011.54     €148,359.48
39                   €68,462       €3,080.77     €158,929.82
40                   €70,000       €3,150.00     €170,099.51
Retirement
41                   €35,000                      €65,099.51
42                   €36,750                      €31,187.26
43                   €38,588                      -€4,420.61
44                   €40,517                     -€41,808.86
45                   €42,543                     -€81,066.53
46                   €44,670                    -€122,287.08
47                   €46,903                    -€165,568.66
48                   €49,249                    -€211,014.32
49                   €51,711                    -€258,732.26
50                   €54,296                    -€308,836.10
51                   €57,011                    -€361,445.13
52                   €59,862                    -€416,684.61
53                   €62,855                    -€474,686.06
54                   €65,998                    -€535,587.59
55                   €69,298                    -€599,534.20
56                   €72,762                    -€666,678.13
57                   €76,401                    -€737,179.26
58                   €80,221                    -€811,205.45
59                   €84,232                    -€888,932.95
60                   €88,443                    -€970,546.82
Pensioner Dies and Spouse Receives Half Pension
61                   €44,222                  -€1,056,241.39
62                   €46,433                  -€1,099,088.67
63                   €48,754                  -€1,144,078.32
64                   €51,192                  -€1,191,317.45
65                   €53,752                  -€1,240,918.54
                  €1,576,661

In this example, the cost to the taxpayer is nearly €1.6 million.

This notional civil servant gets over 7 times more in pension payments than he made.

Unfortunately this example is common. There are many current and past retired and about to retire civil servants to whom these costs apply

I previously made the comment that TK Whittaker because he lived to 100, claiming a pension for 40 years and because his pension was based on the final salary of Secretary of a government department and Governer of the Central Bank he probably received close to 80 times his pension contributions in pension payments, having retired from the Department of Finance in 1969 and the Central Bank in 1977. This estimate excludes any pension he would have got from his time as a Senator.

The actual contribution amount required to fund such a pension is over 39%.

The situation is considerably worse where Gardai are concerned where they can retire on full pension after 30 years. In this case, the retiring Garda gets well over 20 times more in pension payments than he made.

The age profile of the civil service is referred to here:

independent.ie/irish-news/al … 33330.html

This means that they joined before 1995 and so are subject to the lowest pension contribution rates and any of the pension reforms such as pension based on lifetime average salary do not apply. It will take decades before these changes have any significant impact.

The civil service is an expensive luxury taxpayers should not be paying for.


#1942

Thanks CP for attempting this task. A couple of comments (I may have these wrong if so please ignore):

  1. The contribution is 5% rather than 4.5% AFAIK. This is complicated further for post 95 entrants allowing for coordination but maybe recalc with a straight 5% would be more accurate.

  2. To get a spouses pension one must pay an extra 1.5% so it is probably fair to include that also.

  3. For post 95 entrants (it was 95 wasn’t it?) a chunk of the pension comes from their PRSI contibutions. As the typical non-public service person will qualify for this element on a similar basis surely it makes for a fairer comparison to take this element out in some way.

  4. Finally, I do think there needs to be a notional employer contribution taken into account as while I think private sector pension arrangements have gone to s^&*e, nonetheless the norm in the past was for a significant employer contribution. Matching employee contribs was not untypical.


#1943

Also:

  1. While the aggressive salary increases may mirror the benchmarking period they certainly don’t mirror the early partnership years or the last 10 years. They are very unlikely to be sustained over such a long period. Maybe a more realistic approach is required.