LONDON — Chancellor Philip Hammond received some negative publicity over the weekend when several of his colleagues briefed the Sunday papers that he was refusing to lift the 1% pay-rise cap for public sector workers because he believes government employees are “overpaid.”
This is an unpopular thing to say given that police and firefighters have recently put their lives on the line battling terrorists and the Grenfell tower fire. Few would deny that NHS workers and teachers ought to earn more money. And Britain has been worn down by nearly 10 years of austerity economics.
And yet … Hammond has a point.
Public sector workers do tend to earn more, over a lifetime, than their counterparts in the private sector.
Few will admit it, but this divide is one of the main causes of inequality in Britain. The reason: public sector workers tend to have generous “defined benefit” or “final salary” pension schemes. In the private sector, those things have been phased out, following a change in the law back in 1986. Even though some public sector workers may be paid less right now, they’re paid thousands more when they retire — money that private sector workers will never see. (And, to rub it in, those public pensions are generated with tax money paid by private sector workers.) As Hammond told the Andrew Marr show, once you take into account pension wealth, public sector workers do, on average, earn more than people in the private sector.
First, let’s look at what Hammond actually said and then we’ll go through the numbers.
“At a heated cabinet meeting on Tuesday, the chancellor refused to lift the 1% cap on wages for public-sector workers on the grounds that they earn more than those in the private sector, along with generous taxpayer-funded pensions.”
“But Hammond left his colleagues thunderstruck at the language he used. ‘Public-sector workers are overpaid when you take into account pensions,’ he declared. The chancellor then described train drivers as ‘ludicrously overpaid’.”
“When you take into account the very generous contributions that public-sector employers have to pay in for their workers’ very generous pensions, they are still about 10% ahead.”
Public sector workers have had their pay rises limited to 1% per year since 2011, following the 2008 financial crisis. After inflation, that has cut the real value of their wages. The TUC published some data on that, noting, for instance, that some government professionals have lost £4,000 or more from the buying value of their salaries. That certainly sounds as if public sector workers have made real sacrifices.
But all workers are affected by inflation, not just public sector employees. So let’s look at actual pay. According to the ONS, average weekly pay for UK workers in March 2017 breaks down like this:
- Public sector workers: £506 per week
- Private sector workers: £464 per week
The BBC has a nice chart showing weekly wages over time:
The BBC’s page on this is worth reading if you want more context. For instance, private sector pay has been catching up to the public sector over time, and is currently growing faster.
Whether or not £506 per week counts as “overpaid” is a matter of debate. But Hammond is right that public sector workers are paid more than everyone else, on average.
And that is before you get to the pension issue.
Here is how pensions break down, according to the Department for Work & Pensions.
- Public: 92% enrolled in pensions (4.8 million of 5.2 million workers in total)
- Private: 73% enrolled in pensions (11.3 million out of 15.5 million workers in total)
- (Data current to 2016; there are currently 5.4 million public sector workers.)
The distribution of wealth going into those pensions is skewed heavily in favour of the public employees, the DWP says:
- Increase in amount saved from 2015 to 2016:
- Public sector: £1.8 billion (shared between 4.8 million people = £375 each)
- Private sector: £2.0 billion (shared between 15.5 million people = £129 each)
- Total saved, 2016: £87.1 billion
Of that £87.1 billion in pension wealth, public sector workers get more than twice as much as private sector employees (about £8,500 per employee compared to about £4,000 per employee).
As Business Insider’s series on Inequality in Britain has argued, the abolition of defined benefit pensions in the private sector (and the retention of them in the public sector) has stripped workers who joined the workforce after 1986 of about £2.7 trillion in wealth. Those people — millennials, basically — lose £36 billion a year in personal wealth because of this.
This isn’t just a slight divergence around the mean. This is a major contributor to inequality in Britain today: Public sector workers, a minority of all British workers, are marginally better paid on a weekly basis and twice as wealthy upon retirement as the rest of us.
So, you can debate whether “overpaid” was the right or wrong term to use. But the broader picture is that, even after a decade of austerity, public sector workers are still do significantly better off than everyone else.