Britain is handing vast liabilities for public sector pensions over to future generations, warns this new report which has been written on IF’s behalf by the economist Neil Record.
Many people are worried that Britain’s public finances are unsustainable. However, the situation is actually much worse than it appears because – in addition to its official national debt – the government has accumulated enormous unfunded liabilities to pay final salary pensions for public sector workers. Already, the government estimates that these are worth the intimidating sum of £1.1 trillion; however, based on his new analysis of the figures, Neil Record argues that the true estimate should be closer to £1.6 trillion – around half a trillion pounds higher – because the government is guilty of using an artificially high discount rate to make the liabilities appear smaller on paper than they really are.
He argues that the impact of using this artificial discount rate is to mislead all parties involved in the debates over public sector pensions into thinking that the burden is more manageable than it will be in reality. He makes a bold call for the government to replace the artificial discount rate with a market rate, based on the prevailing yield from index-linked government gilts, as this would force today’s policy-makers to confront the size of the burden they are handing to future generations before it is too late.