Echelon - October 2016

Retiring the state pension
For the more than a million state sector workers, trouble- and worry-free retirement is a top job perk. This is because their pay-as-you-go pensions, in retirement, are going to be funded by, well, you. You were never consulted nor did you agree to this, but that’s of no consequence. On your kind behalf, the government has indeed contracted to pay 90% of a government worker’s final salary as a pension in retirement.

The burdensome nature of this future undertaking was underscored by Veritè Research, a think tank, which estimated the implicit net present value of the debt burden this imposes to be equivalent to 90% of GDP. This essentially doubles what we had assumed was the country’s indebtedness.

Unwinding such an obligation isn’t straightforward; because as mentioned at the outset, the unfunded pension for life is a state job perk. Clearly, state employees are poorly paid, have limited career advancement opportunity and work in terribly uninspiring conditions. Naturally, any attempt to withdraw the pension perk will be met with fierce resistance. In our cover story this month, we are discussing the possible avenues for pension reform when the option for this appears limited. We are arguing that retirement savings reform is a critical next step because it’s currently one big mess. Following privatization, reforming retirement savings and pensions is the next available fiscal pressure-releasing reform. It’s time to be thinking of this.