Are public-sector pensions justified?

It’s a debate that has been around for quite some time – and one that doesn’t show any signs of dissipating any time soon. Are public-sector pensions justified?

Deemed by some to be “gold-plated” because they guarantee a certain level of salary on retirement, one of the biggest changes to public-sector pensions came last year, when about 10,000 people were rushed out of their jobs into retirement in order to get their maximum pension benefits.

Following their departure, it was announced earlier this year that highly paid public servants, judges and politicians will have another 8 per cent cut in their pensions over €100,000, bringing their total cut to 28 per cent since the start of the crisis.

Those on pensions between €60,000 and €100,000 will have another 5 per cent cut bringing their total cut to 17 per cent, while those with pensions of between €24,000 and €60,000 will face another 3 per cent cut, bringing their total cut to 12 per cent, while those between €12,000 and €24,000 have another 2 per cent cut, bringing their total cut to 8 per cent. Those on pensions below €12,000 are exempt from cuts. And this is on top of the pension levy introduced in 2009.

Biggest concerns

Indeed, according to a spokeswoman for the Retirement Planning Council of Ireland, which gives training to those preparing for retirement, one of the biggest concerns public-sector workers have is the fear that this levy will be increased.

While this wouldn’t reduce pension benefits, it would further reduce employees’ take-home pay.

However, while benefits may have been modified, it's hard to argue that pension benefits for certain public-sector workers are not very generous. Former secretary general of the Department of the Taoiseach Dermot McCarthy, for example, retired in 2011 on an annual pension of €142,670, as well as a once-off lump sum of €428,011 and another payment of €142,670.

Two-tier system
But is it that different in the private sector? A report last year showed that top company executives got 36 times the average pension contribution. While the average employee was getting a 7 per cent of salary top-up from their company, executives were getting 26 per cent of salary. Where there is a more significant difference, however, is lower down the salary chain. Some suggest that this disparity creates a two-tier system. Representatives of those with private pensions such as the Irish Association of Pension Funds, for example, argue that the imposition of the 0.6 per cent pension levy on private funds – which doesn't impact public-sector workers and which was re-introduced, albeit at a lower rate, in last month's budget – only widens the gap between private and public-sector workers.

While contributions made by public-sector workers are pretty much in line with the private sector, with public servants typically paying 6.5 per cent of annual salary towards their pension, where it differs is the benefits a public-sector pension offers. To get half of their salary on retirement for example – which a public-sector employee might expect – a private-sector worker earning €35,000 would have to set aside 15 per cent of their salary each year towards their pension. A figure which is simply unaffordable for most.