Following on from yesterday's article about Nanny ignoring fiscal reality, and merrily devising new methods of taxing us further in order to meet her personal expenditure requirements, I think it would be appropriate to mention public sector pensions.
To be precise, if the word "precise" can ever be used to describe public sector pensions, the aggregate public sector net liability for unfunded pensions which is estimated by some to be around £1 Trillion (note the total level of public sector debt of the UK stands at £4.8 Trillion).
How do we pay public sector pensions?
Via tax revenues as, unlike the private sector, there is no pension fund (pot of money) set aside to pay for them.
How does the government budget, ie set tax rates, for public sector pensions that are payable for another 10-20 years?
They use a discount rate.
What is a discount rate?
This is the rate applied to current pension payments to tell Nanny what she will need in terms of funding to cover them over 10-20 years.
What is the discount rate used by Nanny to set her tax/pension budget?
According to Robert Peston it is 3%.
OK so far?
The UK economy hasn't grown at 3% for quite a number of years!
In other words the pensions/tax budget that Nanny is using to calculate/cover future unfunded public sector pensions liabilities is bollocks!
This means that when the bills need to be settled over the coming 10-20 years, either taxes will have to go up or public sector pensions will have to be cut.
Needless to say, Nanny hasn't told anyone that yet!
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