Public Service Costs - The Elephant in the Room


#1944

Except time value of money makes such comparisons less meaningful.


#1945

No, it doesn’t really.
For the reason that it only further serves to highlight the difference between value realised from a public service pension, and a privately funded contributory pension.
Indeed you are right, the multiple of value ultimately extracted, above contributions, might decrease - but it would also decrease for any equivalent privately funded contributory pension.


#1946

The calculations are just an example. They do show the substantial difference between the contributions made and the benefits received. There are lots of scenarios that could be run with varying rates of return, ages of retirement, length of service, married vs unmarried, index rate of post-retirement pension and life expectancy.

As far as I am aware the contribution rate for pre-95 civil and many other public servants is 4.5%. Well over half the current civil service falls into this category.

A far more instructive example is one where the required contribution rate is used to pay for the benefits received.

These are the calculations for the same set of assumptions and where the pension contribution rate is 37.33%. It is only at this rate that the contributions made match the benefits received.

The recently introduced additional pension levies for the public service still do not go even close to paying for the actual cost.

At no stage has the real cost and benefit of public service pensions been accepted by public servants and factored into any public sector vs private sector pay comparison, public sector pay benchmarking or public sector pay increase demands.

Year                 Salary    Contribution            Fund
1                    €10,000       €3,733.00       €3,819.75
2                    €11,538       €4,307.31       €8,418.14
3                    €13,077       €4,881.62      €13,834.10
4                    €14,615       €5,455.92      €20,108.51
5                    €16,154       €6,030.23      €27,284.30
6                    €17,692       €6,604.54      €35,406.52
7                    €19,231       €7,178.85      €44,522.52
8                    €20,769       €7,753.15      €54,681.97
9                    €22,308       €8,327.46      €65,937.04
10                   €23,846       €8,901.77      €78,342.52
11                   €25,385       €9,476.08      €91,955.93
12                   €26,923      €10,050.38     €106,837.66
13                   €28,462      €10,624.69     €123,051.13
14                   €30,000      €11,199.00     €140,662.93
15                   €31,538      €11,773.31     €159,742.97
16                   €33,077      €12,347.62     €180,364.67
17                   €34,615      €12,921.92     €202,605.10
18                   €36,154      €13,496.23     €226,545.21
19                   €37,692      €14,070.54     €252,269.98
20                   €39,231      €14,644.85     €279,868.64
21                   €40,769      €15,219.15     €309,434.89
22                   €42,308      €15,793.46     €341,067.11
23                   €43,846      €16,367.77     €374,868.58
24                   €45,385      €16,942.08     €410,947.79
25                   €46,923      €17,516.38     €449,418.61
26                   €48,462      €18,090.69     €490,400.62
27                   €50,000      €18,665.00     €534,019.39
28                   €51,538      €19,239.31     €580,406.75
29                   €53,077      €19,813.62     €629,701.13
30                   €54,615      €20,387.92     €682,047.88
31                   €56,154      €20,962.23     €737,599.63
32                   €57,692      €21,536.54     €796,516.61
33                   €59,231      €22,110.85     €858,967.10
34                   €60,769      €22,685.15     €925,127.77
35                   €62,308      €23,259.46     €995,184.12
36                   €63,846      €23,833.77   €1,069,330.94
37                   €65,385      €24,408.08   €1,147,772.76
38                   €66,923      €24,982.38   €1,230,724.32
39                   €68,462      €25,556.69   €1,318,411.11
40                   €70,000      €26,131.00   €1,411,069.90
Retirement and Lump Sum of €105,000
41                   €35,000                   €1,306,069.90
42                   €36,750                   €1,272,157.65
43                   €38,588                   €1,236,549.79
44                   €40,517                   €1,199,161.53
45                   €42,543                   €1,159,903.87
46                   €44,670                   €1,118,683.31
47                   €46,903                   €1,075,401.73
48                   €49,249                   €1,029,956.08
49                   €51,711                     €982,238.14
50                   €54,296                     €932,134.30
51                   €57,011                     €879,525.27
52                   €59,862                     €824,285.79
53                   €62,855                     €766,284.33
54                   €65,998                     €705,382.80
55                   €69,298                     €641,436.20
56                   €72,762                     €574,292.26
57                   €76,401                     €503,791.13
58                   €80,221                     €429,764.94
59                   €84,232                     €352,037.44
60                   €88,443                     €270,423.57
Pensioner Dies and Spouse Receives Half Pension
61                   €44,222                     €184,729.01
62                   €46,433                     €141,881.72
63                   €48,754                      €96,892.07
64                   €51,192                      €49,652.95
65                   €53,752                          €51.86

#1947

@CP, the calculations are characteristically muck for a few reasons:

-Most public servants are at the top of an increment scale before retirement - so proportionately making more contributions than in your example
-It takes no account of the levy on Public Service Pension Reduction - basically a tax on public service pensions when they are paid
-The pension levy itself
-Post-95ers pay PRSI. For this they get a poor deal, particularly the higher paid. PRSI contributions are no longer capped but the state pension is
-An equivalent private sector worker would of course be receiving tax relief on her contributions - you should impute these in your PS example too.

All of these bias your estimates upwards.

Also, actually well under a half of all public servants are pre-95ers now.


#1948

Would you care to posit your own estimates?


#1949

I have mentioned before on this thread that I have carried them out. Basically at a 2% rate of real return PS pensions are notionally funded. At 1% they are not.

There is really no point in engaging with people who make claims without understanding the intricacies.

In any case - the results are far more sensitive to assumptions about the real rate of return than what you do with the contributions.


#1950

In that case, why not open the public sector schemes to the wider workforce on a voluntary basis? A 2% rate of return seems very achievable over the long term. If it didn’t solve the private sector pension issues at least it would remove the erroneous perception of unfairness. I was a public servant and would much prefer to continue to contribute to a public scheme with guarantees as currently exist rather than trying to navigate the private pension landscape essentially alone.


#1951

I’d love to understand the intricacies. So if you do have numbers to detail on the thread, that would be great.
But it would appear that public service pensions for those who joined the service quite a few years ago will be incredible - and will be in no way notionally funded as you imply above.
I’d really love to believe you, as it would mean that my generation won’t spend the next 30 years funding the equivalent of a good-sized Irish lottery win to each and every retiree.


#1952

I have no real skin in this thread - but my back of the enovolope calculations suggest a 30-40% contribution is required for a PS final salary scheme (assumes typical grade promotions in addition to increments) and 15-20% for the career average version.

People often overlook the 1.5 x salary lump sum, death in service, or the permanent health insurance benefits which are funded from the same contributions.


#1953

What permanent health insurance benefits are these now?


#1954

Because it would expose the state to massive downside risk in the long run. There is no guarantee even of a 2% real rate of return over the long run. The risk-free long-term real rate in the euro area is now below that.

I’ll see if I can do it in a use-able format over the next while.

Benefits for those who joined 25+ years ago are indeed good in actuarial terms- largely because they have only been paying the pension-related deduction (aka ‘pension levy’) since 2009. Entrants since 2013 also face career-average, rather than final-value,-based pensions.

At the same time pretty much all state benefits increased dramatically in the decade to 2007. I can’t find a time series but I seem to recall my grandmother getting by on a state pension of about £70 in the late 90s.


#1955

PS sick scheme kicks in after six months and pays 3/4 of your salary until retirement if you are unable to work.


#1956

That is a disability benefit, not health insurance.


#1957

Love to see your fully set out examples about how the public pensions make sense. Promise I will try hard to understand them.


#1958

Absolutely not correct in the case of civil servants. You go off pay after a maximum of 3 months except in certain limited circumstances. Copy of the relevant circular is below.

circulars.gov.ie/pdf/circular/per/2014/06.pdf


#1959

Well how should the state handle the current downside risk or are you ok with that?


#1960

delete


#1961

That’s what permanent helath insurance is…


#1962

I think you might be confusing an income continuance plan which is not part of the PS sick leave scheme, it’s a private scheme.

The sick leave is 3 months at full pay, 3 months at half pay and after this, if you are eligible for it, the “Critical Illness Protocol” which is (I believe) payable for 2 years.


#1963

Not in my part of the PS. There is a policy available from New Ireland with similar terms to what you describe. This costs about 2% of salary IIRC.