£45bn pension bill dwarfs defence budget

By Steve Doughty for the Daily Mail
Updated: 13:05 EDT, 19 June 2009

Public sector pensions now cost the taxpayer more each year than the cost of defending the country, a report said yesterday.

Pension payout: Public sector pensions cost £6bn more than the defence budget last year

It found that paying the goldplated pensions for the one in five workers who are on the state payroll swallowed more than £45bn last year.

This compares with the £39bn budget the Ministry of Defence is given to run the Army, Navy and Air Force.

The £45.2bn figure was calculated by former Bank of England economist Neil Record for the Policy Exchange think-tank.

It is based on the amount in interest paid last year on debt the Government has racked up to pay public sector pensions - and it has more than doubled in five years, the report said. The findings will fuel unrest over the favoured treatment accorded to state employees.

Nearly six million public sector workers have enjoyed higher pay rises than those in the commercial world in recent years - and many are still getting pay rises while private sector pay is being cut or frozen in the recession.

But the deepest resentment is caused by pensions, which have been severely cut back for private sector workers, partly because of Gordon Brown's £5bn a year tax on private funds.

Four in five public sector workers, by contrast, enjoy schemes that guarantee them up to two thirds of their final pay during retirement. The report calculated that seven eighths of the cost of an average public sector pension is met by the taxpayer.

Mr Record said: 'The Government has allowed public sector pension liabilities to run out of control, using the Treasury spending contributions received for the next generation's pensions to the pay the current generation of pensioners.

'The Government's accounting for these pensions has been arbitrary and opaque, making it all but impossible to understand.'

He added: 'Public sector workers deserve security in retirement. But the worry is that in denying the extraordinary generosity of the current schemes, the Government is creating an apartheid, when comparedto those of the private sector.'

The report said the Government calculates the cost of pensions using interest rate estimates that are lower than the real burden.

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It said the full liability amounts to £1,100bn - 78% of the nation's entire annual economic product. However, the Treasury puts national debt at £750bn, with interest payments of only £ 31.2bn last year.

On average, public sector workers contribute just 6% of their pay towards their pension, the report said. To pay the full price of their pension, they would have to put 48% of their wages into a pension pot.

At present, the shortfall of 42% is made up with 'employer contributions' which come from the taxpayer (14%), while 28% is supplied by the Treasury from current taxation.