Public sector pensions could cost each household up to £1,600 each a year within the next decade because the Government has underestimated the expense of its reforms, a leading think-tank has warned.
Experts from the Centre for Policy Studies claim to have found a new £9 billion-a-year “pensions black hole” that will have to be footed by taxpayer by the beginning of the 2020s.
Its new study says the Government expects the burden on taxpayers to be around £1,230 per household but it could actually be more like £1,600.
The new CPS study lays the blame on unintended "expensive consequences" caused by the introduction of the new flat-rate £144 per week pension at the same time as reforms to reduce the costs of public sector pensions.
It also says Lord Hutton, the architect of the current public sector pension reforms, may have misjudged the costs by using life expectancy figures that are “now six years out of date”. The public sector pension reforms are meant to stop the cost of public sector pensions soaring to unsustainable levels by bringing them into line with private sector deals. As a result, most public sector workers will have to work longer and have lower pensions than they were expecting, which sparked a series of protests and strikes.
However, Michael Johnson, a pensions expert and research fellow at the CPS, claims the reforms will not do enough to get the cost of public sector pensions under control, as the Government has seriously misjudged the impact of its reforms.
According to the study, one unintended consequence that public sector employers - the state - will have to fund a multi-billion increase in National Insurance contributions.
He called for the Coalition to halt its Public Sector Pensions Bill until the “toxic tangle” at the heart of it has been resolved and its costs have been properly calculated.
“If the Bill were to become law as it stands, we would be embarked upon an almost unparalleled perpetration of inter-generational injustice,” he said. “The young will have to pay for the older generation’s pensions at the expense of their own provision. Furthermore, even after the latest reforms, public sector workers will continue to enjoy certainty of income in retirement until the day they die, predominantly paid for by the 80 per cent of the workforce in the private sector, very few of whom enjoy such certainty.”
Tim Knox, a director of the think-tank, said: “It’s effectively a pensions black-hole mostly because of the strange interaction between the new single tier pension and public sector pension reforms.
“Lord Hutton claimed that his proposals for public sector pension reform would be fair, sustainable and balanced, and that taxpayers can have confidence that the costs are controlled. Sadly, none of this is true. Taken together, the Coalition’s pension proposals are unfair and the costs at £1,600 a year for every household are clearly not controlled. This is clearly unsustainable.”
A spokesman for the Department of Work and Pensions said officials “simply do not recognise the figures as presented”.
“The new single tier state pension will be more sustainable and cost the taxpayer no more than the current system,” she said. “To make the state pension simpler and easier to understand, contracting out must end, meaning both employees and employers across the public and private sectors will pay National Insurance at the standard rate."