UK: The Ponzi scheme of public sector pensions

What’s the difference between the financing of pensions in the public sector and a Ponzi scheme? In some respects, nothing at all, even though those involved in the latter are committing a gross financial fraud and belong in prison (like the late Bernie Madoff).

A Ponzi scheme promises a fantastic guaranteed return; but the happy early entrants — who get the advertised gains and unwittingly promote their success to friends — are just receiving the cash put in by the later suckers. In reality the funds are not being invested at all. Eventually the whole thing collapses, when the obligations to the investors can’t be covered by new fundraising.

And the public sector pensions? Well, they are wildly more attractive than anything now available in the private sector, where such defined-benefit schemes (which give a guaranteed, inflation-protected return linked to salary) have all but died out, especially after Gordon Brown removed dividend tax relief.

The official estimated liability for the public sector pensions now owed to all those working or retired stands at around £1.5 trillion (it moves about a lot, depending greatly on interest rates). But when Rachel Reeves stands up in the Commons for her spending review this week, she won’t mention that. Because the government balance sheet showing a public sector debt of £2.6 trillion doesn’t include it at all. It’s off the books.