British public sector pay isn't low, sorry, it just isn't

Those who work in the National Health Service are being warned against leaving the public sector pension scheme. This sounds like extremely good advice as on the numbers given this is the finest investment in the world. Perhaps the occasional equity will do better but this one comes with a government guarantee:

NHS workers are abandoning their generous gold-plated pensions in droves, despite warnings they could face poverty in retirement.

Concerns have been raised over an "epidemic" of workers opting out of the NHS pension scheme after nearly 250,000 staff withdrew from the scheme in the past three years.

Workers who opt out could be giving up pensions worth around nine times what they save, Royal London hospital warned last night.

It said figures revealed under the Freedom of Information act found that 245,561 workers across the NHS in England had opted out of the NHS pension scheme in the past three years.

A nurse earning £25,000 annually who opted out for a year could save £1,420 by doing so.

But it would cost a lump sum of around £13,000 - around nine times the £1,420 saving - to fill the pension hole caused by that one year of lost pension in retirement, Royal London said.

When people opt out they also give up large employer contributions into their pension pot.

There are claims that the British public sector - most especially those Angels of the NHS, the nurses - is underpaid in some manner. But we’ve got to understand that pensions are simply deferred pay. The pension that accumulates this year of your labour is payment for this year of your labour as assuredly as anything that turns up in the wage slips for this year.

Further, given the vagaries of final, average, defined contribution and so on pensions schemes the only useful valuation is the net present value of that future income stream.

When we do this across all of the public sector we get to an interesting result. Largely, and in general, in terms of wages the public sector pays better - adjusting for experience, training, education, all those things - for low end roles than the private and less well for top end jobs. But that’s for wages only. Add in pensions, a useful rule of thumb here being those public sector ones are worth an additional 30% of salary, and the pay scales tip to the public sector doing rather better than the private.

Not that we think so ourselves but it’s possible to argue that this should be so too, those who work for us should be well remunerated perhaps. But what this does show is that the argument that the public sector should get pay rises to keep up with the private workforce is simply false.

Previous
Previous

Optimists

Next
Next

Now, what was it Hayek said about the difficulty of planning economies?