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Ireland’s state pensions and pay safe as private sector funds go down the toilet

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Brendan Howlin (Mark Stedman / Photocall Ireland)
Last week in this column we were looking at the outrageous situation that is now emerging in Ireland over pensions.

To put it simply, anyone who works for the state here has a guaranteed pension.   Anyone who works for a private company has a pension that is going down the toilet unless they are very lucky.

And right on cue, within a day of me writing the column, yet another major Irish company announced that its pension fund was in deep trouble. Arnotts, the Bloomingdale’s of Dublin, is in the process of shutting down its defined benefit pension fund.  

Somewhere around 80 percent of defined benefit pension funds in private sector companies in Ireland are now in deficit.  The accumulated funds, into which the employees have been paying pension contributions over the years, have been so decimated by the financial crash that they won't be able to make their pension payments at expected levels (usually around half final salary). 

Many people will end up getting half of that, or even less.  Some will end up with virtually nothing.

Meanwhile, the people who work for the state will be paid their full pensions and the state will borrow and tax the rest of us to enable them to do so. 

The difference is that state pensions are paid out of current revenue whereas private pensions are paid out of the returns from investment funds, most of which are now in negative territory. 

You don't hear much about this because the university academics who are always writing in the papers here about aspects of our economic meltdown are strangely silent on this issue. 

Could the fact that university teachers, like all other teachers here, are paid by the state and therefore will be getting their big state pensions guaranteed for life have anything to do with their silence?
Perish the thought. 

It's not just pensions for state workers that is an emerging issue here now, however.  Pay is a big issue as well. 

Both pay and pensions in the state sector -- and there are close to 400,000 people on the state payroll here, or close to 20 percent of the workforce  -- have managed to continue on as though the economic crisis in Ireland had never happened, even though average pay for state workers here is among the highest in Europe.   

Pay and pensions for state workers have been squeezed ever so slightly over the past two years.  In comparison to the carnage that has happened in the private sector, however, it's merely a token. 

Pay in the state sector is protected under the Croke Park Agreement 2010 to 2014, the deal the last government did with the unions to avoid strikes. Under the agreement there can be no pay cuts.

In effect, what this has meant is that new entrants into the state service now get lower pay and poorer pensions, but all the existing state workers are protected from any pay or pension cuts and so have been able to ignore the recession.

The only way the government has been able to trim the state pay bill is by cutting employee numbers -- and that has only been partly successful because it triggers the high pensions.  It also, of course, reduces state services for the public but, hey, who cares about that? 

Meanwhile, state revenue is way down as the economy continues to struggle.  But state pay is not dependent on revenue. Like pensions for state workers it comes out of tax, and if there isn't enough tax revenue, it comes out of borrowing that we will all ultimately have to pay back. 

Over the past three or four years, many workers in private companies here have been hit by the desperate attempts of their companies to survive.   They have taken pay cuts, they work longer hours, don't get overtime pay and so on.   Any perks or extras that were there have been whittled away. 

And at the same time, of course, they are being hit by extra taxes and cuts in public services or new charges as the government struggles to meet the annual deficit targets set by the EU/IMF.

The result of all this is a growing anger in the private sector at the fact that state sector workers have been able to avoid sharing the financial pain by flexing their union muscle.

Just last week, for example, a statistic emerged that is likely to further enrage private sector workers.
So far in 2012, average weekly earnings in the public sector have increased by 2.8 percent. 

Yes, you read that right.  Pay for state workers INCREASED this year, even though the state is bust.
This happened because pay increments -- automatic pay increases based on length of service -- kicked in. 

It also emerged that the cuts that were supposed to be coming in the "allowances" that many state workers get were not going to be implemented. These are extra payments for all kinds of things like filing paper records to using new technology (computers!) to eating lunch at your desk!

There are literally hundreds of these allowances, some justified, most just ridiculous.  Payments of this kind have vanished in the private sector, but they are alive and well in our Dickensian state services. 

Public Expenditure Minister Brendan Howlin had committed himself to getting rid of them. But last week, in yet another humiliating climbdown, he caved in to the unions who are insisting they are an integral part of pay and therefore, under the Croke Park Agreement, cannot be touched.

All this adds up to such an outrageous situation that it's almost funny.  But it's far from funny.  In fact it's tragic.  Because the inability of this government to face up to pay and pensions reform in our huge state sector has implications elsewhere that are heartbreaking. 

The fact is that if savings cannot be made on the state payroll bill, they have to be made elsewhere.  As you know, we have to reduce our budget deficit by another €3.5 billion next year under the terms of our EU/IMF bailout deal.  That has to mean major cuts in state spending, and the fact is that most state spending goes on pay and pensions to state workers.

But if we can't cut pay and pensions for state workers, what does the government do?  The only thing they can do is cut services to the public.

Let's look at health, one of the biggest spending government departments here.  Around 80 percent of spending on our health service goes on pay and pensions. It was heading for a €500 million overrun in spending for this year until the IMF stepped in a few weeks back and told the government to do something about it.

The (Fine Gael) Minister for Health James Reilly pointed out that saving money was very difficult when 80 percent of spending cannot be touched because it is pay and pensions.  He bluntly said we had to face up to this, leading to a public argument with Labor’s Howlin and predictions that the coalition government might collapse.

The Health Service announced a package of immediate cuts adding up to more than €100 million.
None of this was in pay to state workers. But around €2 million of it was cuts in the financial assistance given to around  200 carers (ordinary people who look after disabled relatives at home -- typically mentally handicapped children or old folk with Alzheimers).

That's the level we are at here.  The refusal of the state sector unions to accept any cuts in pay has real consequences for ordinary people here who don't have any power to defend themselves against cuts.  

The incremental pay increases for state workers I was talking about above, for example, will cost around €200 million next year. That would pay for a lot of the overrun in the health budget without having to cut services to vulnerable people. 

But the state worker unions won't agree to that, of course.  And because the Labor Party is so dependent on these unions, it won't do anything about it in government.  Instead of being called the minister for public expenditure, Howlin should be called the minister for caving into the unions. 

Of course it doesn't take emotive examples like the cuts to home carers to make this argument.  The fact that pay in the private sector has been falling sharply in the past few years and pensions are in crisis alone should be enough to justify major cuts in pay and pensions in the state sector, particularly at the middle to higher end.  Equity across the Irish work force demands that.

Add to that the fact that the tax revenue which is supposed to fund state pay and pensions has collapsed and the issue is beyond argument.  In the private sector if companies don't have the money they make pay cuts and close down pensions because if they don't, they go bankrupt.   It's that simple -- if they don't have the money, they can't pay.

In the parallel universe of the state sector, however, if the government doesn't have the money it borrows rather than make any cuts in pay or pensions.

Meanwhile, there are huge cuts in state services and big extra taxes on the way in the December budget to find the €3.5 billion reduction in the deficit we have to make next year.  That will impact on all kinds of state services for the vulnerable groups who don't have the political muscle to fight back.   But pay and pensions for state workers will carry on as though we are still in the middle of the
boom. 

Howlin's full title, by the way, is minister for public expenditure and reform. That's right -- REFORM. Don't laugh.

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