British Taxpayers Face £2.2 trillion ($3.5 trillion) Unfunded Pension Liability

It seems that taxpayers are struggling with pension problems across the pond as well. According to an article in the UK’s Telegraph, British taxpayers are on the hook for £2.2 trillion ($3.5 trillion) in unfunded pension liabilities. That amount would more than triple the size of the national debt, and equates to approximately £80,000 ($128,500) for every household in Britain.

The article summarizes the findings of an Office for National Statistics (ONS) report on the costs of the state’s old age pension system and public-sector pensions:

The total public-sector pensions bill is now £810 billion ($1.3 trillion) . . . . The majority of the state employees are on generous final salary schemes unattainable elsewhere in the UK.
This bill for key public sector workers’ pensions has rocketed by 20% between 2006 and 2008.
The Government Actuary’s Department’s estimate of the cost of the state pension due to all workers is £1.35 trillion ($2.2 trillion) as of 2005—equivalent to almost 100% of Britain’s annual economic output.

Unlike here in the U.S., the British pensions are entirely unfunded, so they will “have to be paid directly by future generations of taxpayers, rather than out of a pot contributed to by the pensioners themselves.”

The article continues:

The revelations, contained in the ONS’s Pensions Trends document, underline the scale of the long-term fiscal crisis facing this and future governments — even before the added costs of the economic and financial crisis are taken into account.

The Treasury itself has never published its own comprehensive calculation of the size of Britain’s unfunded pensions liabilities.

A range of institutions, including the International Monetary Fund, the Organisation for Economic Co-operation and Development and ratings agencies such as Standard and Poor’s, have warned Britain that unless it takes drastic action over a long period of time, these pensions costs could trigger fiscal crises in the future. . . .

Independent pensions consultant John Ralfe said: “The real worry here are the figures on the public sector pensions. The old age pension age could be changed relatively quickly, so the liabilities there could be tackled almost overnight. You can’t do that with the public sector pension, which is contractually agreed.”

The Treasury has always been reluctant to release details of the size of the public sector pensions liability, but in a supplementary document produced alongside the [Chancellor’s pre-Budget report] on long-term fiscal projections it said that the bill for public sector pensions had crept up to £810bn.

A recent study from the Institute for Fiscal Studies showed that the final salary schemes offered to public sector employees are even more generous than those given to private sector workers with equivalent pension schemes.

The public pension issue will be one that will be huge for years to come, as governments continue to try to postpone the fiscal reckoning just a little bit longer. The sooner the liabilities are paid and the system reformed, however, the less will be the ultimate cost to taxpayers. It is long past time that public-sector pay and benefits be reduced to the levels received in the private sector. The implementation of requirements that voters ratify any public-sector benefits increases and a switch to a 401(k)-style defined contribution retirement system for new government employees could check undue labor union power and help prevent further such extravagances in the future.