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.
And, which is where it becomes even more Ponzi-like, the government doesn’t invest or put anything aside for paying out to the scheme’s millions of participants on retirement. There’s a simple reason for this. It doesn’t need to, because it relies on future taxpayers to meet the commitment.
As the former Bank of England economist Neil Record points out: “When a Ponzi scheme crashes, all the remaining investors are wiped out. By contrast, because the government is the promoter of this Ponzi scheme, the investors (pensioners) are not wiped out — they will get their money. It’s future taxpayers who get wiped out — they have to pay for all the money that should have been invested but was spent.”
Record, who, after leaving the Bank of England, made his fortune in currency risk management, believes the true bill for what we can only describe as “unfunded” public sector pensions is, when factors such as future wage growth and inflation are taken into account, almost £5 trillion.
He told The Telegraph: “The government has for years hidden from view its largest debt — what it owes to public sector pensioners. It will have to pay the enormous sum of around £4.9 trillion over the next 80 years to fulfil its legally enforceable pension promises even if it closes its pension schemes today.”
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