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Analysis/Comment Last Updated: Aug 23, 2010 - 8:24:15 PM


Crony Ireland and misperceptions on pay and pensions between Irish public and private sector workers
By Michael Hennigan, Founder and Editor of Finfacts
Jan 26, 2009 - 8:39:44 AM

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This week is supposed to be another crunch week in the Government's slow-motion process of bringing order to the Irish public finances. What is clear from the public debate about pay and pensions in the public and private sectors, is that misperceptions are rife and it appears that the distorted view of the private sector, which was the genesis of sham benchmarking a decade ago, remains strong. Crony Ireland and a small segment in clover while a million workers without an occupational pension and 150,000 facing job losses in 2009 alone, is far from a world of nirvana, which it appears to be perceived from the vantage of the public service.

In the public sector, since 1997, the politicians have been the biggest gainers both in pay and expenses hikes. The average earnings of a member of the Dáil (Lower House of Irish Parliament) is  €122,000, equivalent to the earnings of a United States Senator at $169,000. Some members of the Dáil, can get as much in tax-free expenses as their salary. Is it any wonder, that only a small number of the 216 members of the Oireachtas, have anything to say on the current economic crisis?

A decade ago, news stories of dot-com millionaires, gave rise to the claim that private sector workers were earning more than comparable grades in the public services. It was shown to be a sham and pensions were ignored in the comparison. A special pay hike of 9% was given to all politicians - ministers got two hikes, public servants and retirees. In recent times, the property barons and a small minority made killings during the boom as part of the crony capitalism system which dominates in Ireland, in the parallel world to the multinational sector, including the top earning staff at the State broadcaster RTÉ. They are far from representative of the private sector where the annual industrial wage is €32,000.

Research carried out at the public institutions: ESRI (Economic and Social Research Institute) and at universities NUI Maynooth and UCD, presents a different picture to a recent letter writer in the Irish Times:

Madam, – I have had just about enough of the private sector commentators and so-called “financial experts” who are trying to create ill will between civil and public servants and the people they serve. The constant carping about job security and pensions which, it is alleged, are a burden on “the taxpayer”, serves no useful purpose and is totally misleading. Are they implying that teachers, nurses and gardaí do not pay tax? Unlike many people in the private sector, they are PAYE workers and cannot avoid their taxes.

As a teacher, I am well used to the attitude of certain elements of the private sector, who for the last number of years had a fine contempt for those of us who were not “profit-making entrepreneurs”. The Gordon Gekko mentality of greed and vulgarity ruled supreme in Ireland for more than 10 years and those of us who were not members of the financial elite were treated as utter fools when we said a downturn was coming. I clearly recall a speech by the former Taoiseach, Bertie Ahern, in which he wondered how people who were talking down the economy didn’t “commit suicide”.

Throughout the Celtic Tiger era, Irish society received a superb return on its very low investment in education – the second lowest of all OECD countries. (Since the recent education cuts, we are now probably at the bottom.) Despite this, educational standards were placed among the highest in the OECD. An incredible bargain, which even an economist should be able to understand.

While gardaí continued to put their lives on the line to protect our freedom and nurses performed miracles in AE departments, teachers faithfully honoured their contract with their students, preparing them for life and always making the deadline for State exams. They also regularly gave up their evenings and weekends, for no extra pay, to support students in sporting, musical, scientific, artistic and other activities. It would be interesting to know how many in the private sector are willing to work in the evenings and at weekends for no pay.

The current appeal to patriotism in the civil and public service I find truly nauseating. A patriot is one who works hard and pays his or her taxes. Throughout the years of the Celtic Tiger, there were no greater patriots than those who worked at “the coalface” and tried to hold the social fabric together while some of those entrusted with the management of the nation’s finances lined their pockets and achieved levels of incompetence and corruption that have left our country a wasteland. Not once have I heard an apology from those whose dishonesty and incompetence have bankrupted the country. Ibec’s suggestion that teachers should now take a salary cut in order to pay for this just beggars belief.

In the wake of limitless greed, we now have limitless arrogance. – Yours, etc,

SUSIE HALL,

Dublin Road,

Malahide,

Co Dublin.

The most recent data on comparable pay is from the ESRI in Dec 2008:

Irish public sector pay excluding pensions exceeds private sector pay by 10% for top jobs to up to 30% for other grades  - - includes research on sham benchmarking

The ESRI researchers Elish Kelly, Séamus McGuinness and Philip O'Connell, said the gap between public and private sector pay in Ireland is "far higher" than in many other countries. The average wage advantage increased to 20 per cent in 2006 from less than 10 per cent in 2003 due to several pay awards, while the pay gap in the rest of Europe rarely exceeds 10 per cent. "This differential would be difficult to justify in normal economic circumstances," they say.

On sham benchmarking,
research done by economist Jim O'Leary and colleagues at NUI Maynooth, showed that on average, public servants earned 13% more than their private sector counterparts on a like-for-like basis in 2001.

The Government did not dispute the findings.

Example of Public Sector Pay: National Consumer Agency - about 25 staff and 13 Board members.

CEO Ann Fitzgerald earns €182,000 plus pension


Industrial Earnings:

Table 7 for "Clerical Employees" (non-managerial admin staff)

Electricity, gas and water supply Weekly Earnings €946.82 (ESB, Bord Gais)

Manufacture of optical and electrical equipment €813.09 (Intel, Dell - dominated by multinational sector)

ESB and Bord Gais staff have been allocated free shares in the State-owned enterprises.

PENSIONS:

Majority of private sector workers have no occupational pensions. Of the minority, some have been badly hit by the shares plunge

Irish Public Sector Pensions' bill jumped €743m to €1.8bn in 5 years to 2008 - up 66.5% compared with pay rise of 45.4%; 57% of Irish private sector workers have no occupational pension

According to Bank of Ireland Life two weeks ago, a 40 year old who started a pension ten years ago, has seen a fall of about one-third in the value of his pension fund.

Dr. Shane Whelan, an actuary based at the UCD School of Mathematics, says the State's exposure to the pension promises already made to public servants is over €100 billion and not the €75 billion indicated by then Finance Minister Brian Cowen, in early 2008. The value of the pension reserve fund is about €17 billion - accounting for Q4 losses.

Charlie Weston of the Independent reported last month that results of a study by UCD academics Whelan and Michael Moloney - - Pension Insecurity in Ireland - - will be presented to the Statistical and Social Inquiry Society of Ireland this month.

Weston reported that the second benchmarking report concluded that public sector pensions were worth an additional 20% on top of the salary of the average civil and public servant. It said this meant no benchmarking pay rise was due to most public servants.

But that benchmarking report decided to exclude the almost one million people in the private sector who have no pension, and in so doing concluded that the value of the pensions bonanza for public servants was worth just 12% to State employees.

However, the paper by Whelan and Moloney dismisses these figures. It implies that the one million have to be accounted for when comparing pensions between the private and public sectors.

It says the cost to the State of providing a public sector pension is not 20%, but instead 30% of the salary of a public servant.

The reasons for the new higher value for public sector pensions is that there is no risk to a State employee that their pension will not be paid, unlike in the private sector where massive investment losses have put a question mark over pensions.

Dr Whelan adapts a fair value concept to value pensions in both the private and public sectors and, when this approach is used, public sector pensions are 30% better than those in the private sector.

Additionally, pensions coverage in the public sector is almost universal, the pensions are guaranteed by the State and public servants get pensions rises (known as parity pay) based on the salary rises given for the grade the person retired at.


Public Sector Pensions Link with Current Salaries
The pensions link with contemporary salary levels, puts the public sector scheme among the best in the world.

For example, in 2007, when the current Dublin City Manager, got a 36% pay hike, his two living predecessors got a 36% hike in their pensions.

If that system was replicated across the economy for ALL workers, the current financial crisis would look like Noddy's playtime.

The Irish Times said in an article two weeks ago: "In the public sector, the employers’ contribution rate is around 19 per cent of salary. The estimated value of this benefit for a similar employee in the private sector would be around 25% of salary, according to Ibec."

Deloitte & Touche for the Sunday Business Post in 2005, compared a private and public sector worker both earning €135,000 per year to see how they fared on retirement income.

Despite both employees earning the same annual salary of €135,000 and maximum funding, the private sector employee will retire on a significantly lower income.

The civil servant ended up on a retirement salary of €67,500, while his private sector equivalent ended up earning €57,349.

The gap between the two is a substantial €10,151 per year.

This gap will widen over the years, as public servant pensions are linked to the wage deals negotiated by government employee unions, not inflation. This makes the pension even more valuable.

“Even including the state benefit, based on current age-based contribution limits, it would not be possible for them to build up a fund that would match the pension entitlements of the public servant,” said Maeve Corr, a director with Deloitte Pensions and Investments.

The reason private and public sector pensions cannot be compared exactly is because private workers pay PRSI to fund their state or old-age pension.

They also fund their pension from their untaxed income, whereas the public servant is provided with the pension in addition to his or her gross income.

A further difference is each individual's entitlement to tax-free cash lump sums on retirement. A public servant on a defined benefit pension (percentage of final salary) can take 1.5 times their final salary as a tax-free cash lump sum.

A defined contribution private sector pension holder may take 25 per cent of the final fund value or 1.5 times their final salary, depending on the scheme they belong to.

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© Copyright 2010 by Finfacts.com

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