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Public Sector Pensions Discount Rate
Andrew G. Biggs; and more
发表日期2011-04-26
出版年2011
语种英语
摘要Rt Hon George Osborne MP Chancellor of the Exchequer HM Treasury Horse Guards Road London SW1A 2HQ   Dear Mr Osborne, You announced in the Budget that the annual cost of new public sector pension promises would be calculated using a discount rate of expected GDP growth above inflation and the formal reasons for this were published on April 6th. We are writing to ask that you re-consider this decision which we believe fundamentally misrepresents the economics of public sector pensions and has serious pernicious consequences. In our view the correct discount rate should be based on the yield on long-dated index-linked gilts, (adjusted for the difference between consumer price inflation and retail price inflation), since public sector pensions and index-linked gilts share similar characteristics. Both are obligations of the UK government, both are contractually committed, legally-binding and both are inflation-linked. The Consultation suggests the argument for using expected GDP growth is that pensions are “paid for out of future tax revenues”. But gilt interest and principal payments are also paid for out of future tax revenues. This clearly does not mean that new gilt issues should be valued by discounting payments in line with expected GDP growth, rather than the market gilt rate. In using expected GDP growth, the Treasury has not explained how an obligation to pay a public sector pension differs from an obligation to pay gilts. If there is no difference, then pensions should be discounted at the gilt rate. The other possibility, that gilt payments should be discounted at the expected GDP growth rate, is immediately contradicted by the market. The government’s approach implies that it is cheaper for it to promise an inflation-linked pension payment to a public sector employee than it is to pay the coupon and principal on an index-linked bond. By overstating the discount rate we understate both the current economic cost of public sector pensions and the real economic savings from the Hutton Report’s recommendations. It also means that the efficiency of individual public sector bodies is overstated, as employment costs are understated and at the macro-level, the current generation of taxpayers is passing on an economic cost to be paid by future generations. We must be clear that public sector pensions are not discretionary government spending, like health or education, which, subject to the ballot box, can be reduced to maintain affordability. They are deferred pay earned as part of a legally binding contract of employment, the equivalent of giving gilts to be redeemed at retirement and we believe their true cost should be properly measured. In light of this we ask you to re-consider this decision.   Yours sincerely,   [This letter is signed in a personal capacity and any institutional affiliation does not imply endorsement by that institution]   Lawrence Bader Fellow of the Society of Actuaries     Andrew G. Biggs Resident Scholar The American Enterprise Institute   Zvi Bodie Professor of Management, Finance and Economics Boston University School of Management   Jeffrey R. Brown William G. Karnes Professor of Finance and Director of the Center for Business & Public Policy University of Illinois   Jeremy I. Bulow Richard Stepp Professor of Economics Graduate School of Business Stanford University   Wayne Cannon Fellow of the Institute of Actuaries of Australia   Bernard Casey Principal Research Fellow Warwick Institute for Employment Research   Daniel Clarke Departmental Lecturer in Actuarial Science Department of Statistics University of Oxford   Tony Day Founder Scarce Capital   Jon Exley Fellow of The Institute of Actuaries Thornton Steward Jeremy Gold Jeremy Gold Pensions   Philip Lawlor   David A. Love Assistant Professor of Economics Williams College Jon Palin Fellow of The Institute of Actuaries   George G. Pennacchi Professor of Finance University of Illinois   John Ralfe John Ralfe Consulting   Neil Record Institute of Economic Affairs Ronald J. Ryan, CFA Chief Executive Officer Ryan ALM, Inc. Crispin Southgate 55 Calton Avenue London, SE21 7DF Cliff Speed Fellow of the Faculty of Actuaries David Starkie Senior Associate Case Associates Ian Sykes Fellow of The Institute of Actuaries   Peter Tompkins Fellow of the Institute and Faculty of Actuaries     Simon Scarpa
主题Economics ; Aging
标签employers ; employment ; federal debt ; government spending ; Pensions
URLhttps://www.aei.org/articles/public-sector-pensions-discount-rate/
来源智库American Enterprise Institute (United States)
资源类型智库出版物
条目标识符http://119.78.100.153/handle/2XGU8XDN/250551
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GB/T 7714		 Andrew G. Biggs,and more. Public Sector Pensions Discount Rate. 2011.
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