Public Sector Pay Cuts

Speaking on today’s News at One, George Lee pointed to informal evidence from the Central Bank of average wage cuts in the private sector of 8%.  He then immediately noted that this raised the question of why there had been no wage cuts in the public sector.  (About 3.20 minutes in.)  George has a well-deserved reputation as an excellent economics reporter, perhaps the best of his kind on these islands, but this statement was unfair and unhelpful.   The pension levy is a wage cut.  It reduced the taxable income of public servants by an average of 7.5%, thus putting public sector workers exactly in line with the private sector figures that George is quoting.

As a public servant myself, I am conscious of the need to be careful when making statements about public sector pay.  However, the bottom line has to be this.  What is useful here is fair analysis of the full compensation package for public servants (including pension packages and the effect of levies) in comparison with the private sector—and the Irish economics profession has provided research of exactly this type.  What is not useful is analysis in which a pay cut is real if it happens in the private sector but not real if it happens in the public sector just because someone chooses to call it a levy.

I expect here that I will get a flood of comments linking the pension levy to the generosity of public sector pay packages.  But this would miss the point I’m making.  There is no link between this levy and public sector pensions.  The only real implication of the levy for public sector workers was to reduce their take-home pay.  Perhaps this step was needed (and perhaps more is needed) but let’s not pretend it didn’t happen.

40 thoughts on “Public Sector Pay Cuts”

  1. I bet there are loads of private sector worker who wish they could claim tax relief off their pays cuts. That is, if they are lucky enough to be getting pay cuts.

    The real problem is government spending which has been out of control for many years. And the only way to deal with that is to cut spending – It seems that public sector economists are unique in their profession in calling for tax increases during a recession..

  2. Eamon’s suggestion that private sector workers are not having their income taxes reduced when their wages are cut suggests the government has introduced a new approach to cutting the deficit—taxing people on income they don’t even earn. I missed that one but it sounds like it has great potential as a revenue generator.

  3. I heard the same interview and wondered how many public sector workers now wish that they had received something called a pay cut rather than something called a pension levy.

  4. Average wage cuts of 8% sound high to me. Does anyone know the source for this? I just had a quick scan of the Quarterly Bulletin posted on the Central Bank’s website and couldn’t find a number there, not to mind a data source. But maybe I’m missing it. Or maybe ‘informal evidence’ means a number someone made up?

  5. Hasn’t the CSO published figures today that the average wage in the public sector has increased by 3.2%?. Pensions for the private worker is like going to Paddy Powers and having a bet. It is different for the public sector. I am not against the public sector and how they are paid but whenever there is a need to justify a pay rise within a company the usual step is to compare the market for a similar role and check pay rates and benefits to justify the pay rise. If the worker happens to be in the public sector then that leads to the usual moaning. I’m not targeting the public sector here , I would take a job there in the morning and complain like the best of them if I had to pay a pension level…

  6. Sorry Karl

    The point I was trying to make is that your pay cut is offset by the tax relief. I understand that he average public sector worker on 50K is subject to a 7.5 pension levy. So in reality, the real cut will be 4\5% depending on circumstance.

    As to my second point. I understand the need for tax increases to rebalance the ratio between direct and indirect revenue streams. But I would like to know your view on trying to go beyond that. Won’t that just take demand out of the economy at the very time we should be trying to stimulate it.

  7. Eamon,

    A gross pay cut for a private sector worker of say 8% is also less in net terms for the same reason, i.e. they pay less tax. On your second point, of course tax increases will take demand out of the economy – but so too will spending cuts, including public sector pay cuts. In fact, non-wage spending cuts are likely to reduce demand more than tax increases since some proportion of what is taxed would not have been spent if left in the hands of private actors (whereas the government knows that what it spends is actually being, well, spent).

  8. doubt 8% is that high if you take into account the fact that the majority of people who usually receive bonuses would not have received them this year, which often accounted for c. 10% of salaries.

    would be interested in seeing whether if you calculated a ‘per hour rate’ would it show that the private sector has actually taken less pain than their public sector counterparts.

    e.g is private sector working less hours now than in the past and therefore has actually more leisure time now at a similar per hour pay level vs. public sector who are probably working the same hours (or more?) for less money?

  9. Sorry Karl I don’t understand the logic of your post, why are you against further pay cuts in the public sector as distinct from labelling issues?

    Direct quote from ESRI abstract:

    “The results indicate that the public sector pay premium increased dramatically from 7.7 to 23.5 per cent between 2003 and 2006. Furthermore, we found that by 2006 senior public service workers earned approximately 10 per cent more than their private sector counterparts, while those in lower-level grades earned between 24 and 32 per cent more. The public premium results derived in this paper relating to March 2006 predate the payment of the two most recent Social Partnership wage deals, along with the pay increases awarded in the second Benchmarking exercise and by the Review Body on Higher Remuneration in Reports No. 42 and 43”.

    Also, a rare quote of sense from a politician in this country:

    “The Government’s budget has once again fallen apart. Its plan to spend €65 billion is only supported by €34 billion in tax. The Government is travelling on a road that can only lead to ruin. No country can borrow 12.75 per cent of a rapidly shrinking income and hope to survive”.

    “This situation is the consequence of eight years of economic mismanagement and 18 months of denial and incompetence in the face of the mounting crises”.

    – Richard Bruton TD – The Irish Times, 3rd April 2009

    I suspect we’re heading for our Thatcher moment where the government is going to have to finally confront the unions and the public sector if this country is to get back on its feet. Obviously, FF & Labour will not be up to this important job.

  10. By the way, excellent article in today’s Irish Times business section on best way to pursue banking reform, perhaps a presentation to the Minister is in order.

  11. Karl

    while you’re right that the pension levy has reduced real gross wages by 7.5% (and net wages by 4.5% or so), the reality is that they have been receiving a massive subsidy for years in regard to pensions, and this is simply the first step to fixing this discrepancy. That an actual headline decrease in gross wages of a further 5-10% is possibly justified in the same year as the pension levy is an unfortunate, but honest, suggestion/proposal.

    We can either accept and deal with the reality of public sector wages being still far far too high, or we can teeter merrily into the oncoming abyss, claiming that public vs private sector ‘class warfare’ is being enacted by IBEC and is the real root cause of the problems before us.

  12. The available data do not yet reveal any large wage cuts.
    Weekly earnings in Building and Construction fell by 2.4%, comparing December 2008 with December 2007. This was due to a 4.7% fall in hours worked, while the hourly wage rate rose by 2.3%.
    For most other sectors, the latest available earnings data relate to 2008Q3. The only declines evident at that time were in Motor Trades (down 3% from peak), Real Estate (also down 3%), Other Business Services (down 4%), and Financial Services (down 5.5%).
    Meanwhile, weekly earnings in the Public Sector increased by 3.3%, comparing 2008Q4 with 2007Q4.

  13. Did I miss something? I thought the pension levy was a mechanism for public sector workers to contribute to their own pensions. In other words, it’s not a pay cut as such but a reallocation of compensation. A private sector worker who gets a pay cut has a reduction in take home pay AND pension contributions. The overall compensation declines. Not so for the public sector worker. Or have I completely misunderstood?

  14. Jon: There is no corresponding increase in pension entitlements. So the pension contribution doesn’t ever come back to the worker i.e. the don’t get a bigger pension than they used to, but are now paying x% of their pay as a pension levy. Therefore, pay cut.

  15. so is the government reducing their contribution and forcing the workers to increase theirs?

  16. Shane,
    So they just have to do what virtually every private sector worker has always had to do, only less so. I’m shovelling a fifth of my gross income into a DC scheme that’s lost more than a quarter of its value in the last year. My employer puts in 5%. I’d have to increase my contributions by more than 7.5% just to RECOVER my pension ‘entitlement’ level, let alone increase it. Is that not technically a pay cut according to the pension levy logic you’re applying? Cry me a river, public sector workers. Because of the structure of their pensions, their take home pay was already much higher than a supposedly corresponding private sector worker.

  17. The tax point on the pension levy above is that there will be a deduction against salary after the levy for the pension levy itself. Therefore the levy is not the same as a pay reduction.

  18. Shane, basically they’ve been receiving somewhat for free for the last however many years, and now they’re being asked to pay for it (actually, they’re being asked to pay a fraction of its true worth). While familiarity is said to breed contempt, this is taking things a bit too far i think, don’t you? Please remember that the whole ‘cheap guaranteed defined benefit pensions’ thing was always a massive complaint of those who felt the benchmarking process was hugely and inherently flawed.

  19. 1. Most public sector workers have been contributing to their pensions for the last 14 years (6.5% superannuation charge, plus PRSI contributions [as contributory pensions makes up part of final pension for post ’95 entrants]).

    2. Non-pensionable pay is also subject to the levy.

    3. Public sector pension contributions (pension levy plus 6.5% superannuation charge) flow back into the government’s coffers and are not allocated to a distinct fund. This means that in some ways public sector pensions are the least safe, or indeed guaranteed, pensions in the state.

  20. “putting public sector workers exactly in line with the private sector”: do not private sector workers suffer a wage cut when they lose their jobs?

  21. karl – just comparing wages between public sector and private sector should be banned as an activity. How does the spiraling amount of private sector lay-off’s fit into your analysis? At a time where we are nudging toward 400,000 people unemployed, it does seem appropriate that people in the public sector at least countenance the notion of taking a hit if it can mean stimulating job growth in the private sector.

  22. IBEC says that 20% of its members have cut wages (with another 15% thinking about it). ISME says that 41% of its members have cut wages, with an average wage cut (among those cutting) of 13% (16% in micro-enterprises. Since IBEC’s membership is weighted strongly towards large firms, and ISME’s towards small ones, these two reports indicate that wage cuts have been concentrated in smaller employers, as might be expected. But let’s say for the moment that 40% of all firms applied cuts of 13%, this would give an average cut of 5%.

    For a back-of-the-envelope calculation that might take account of the firm-size differences, I had a look at the firm size distribution of employment in manufacturing, and about 20% of employees work in firms with less than 50 workers (Eurostat website figs for 2006). Say we assume that 40% of those firms have applied a wage cut of 13% and 20% of larger firms have applied the same cut (the latter figure is completely made up). That would give an average wage cut of 3% (.13((.4x.2)+(.2x.8))).

    So I still maintain that 8% average cut in the private sector is high. For sure, cuts are happening, and they are a very welcome indication of labour market flexibility in Ireland. But I don’t see how it helps to introduce made-up numbers into the argument; the real ones are argument enough. I think further public sector pay cuts may be needed, but not because of exaggerated private sector cuts.

    I completely concur with Karl that the pension levy is a pay cut. In fact, although the average pension levy was 7.5%, this had an effect closer to a 10% pay cut, since an increase in pension contributions reduces the amount of tax paid, but not the amount of PRSI or levies; a pay cut would have also reduced the latter.

  23. Many employees in the private sector are paid on the basis of commission, or performance related bonus, or profit sharing. As such, their pay is always prone to a cyclical variable, benefitting in the good times and seeing their take home pay reduced in a downturn. Moreover, their job security obviously weakens considerably in a downturn, to the point right now where we’ve got a couple of thousand private sector workers losing their jobs every week. Even their long term situation is under threat due to pension value/worth being massively eroded by both falling stock markets as well as companies going bust and leaving a pension fund deficit in their wake.

    Is it really asking so much that the public sector workers live in a world that experiences at least some of these harsh realities that the private sector workers are facing every day? Is it really such a bizarre notion that some form of cyclicality is brought into the public sector pay bill? Is it really such a terrible suggestion that public sector workers, who fought so hard for a benchmarking process that brought their pay in line with the private sector, should experience some of the disadvantages of the private sector as well?

  24. Social welfare to cost at least 21 billion, health service to cost 14 billion. End of story! Ireland to borrow 50 million a day in order to survive until the next day when it borrows another 50 million? I have just watched a procession of cars going into and coming out of government buildings all 2008 registered vehicles driven by Public sector union officials. Things cannot be that bad. At least they are doing their bit for the car industry! In a former life, it almost seems that long ago, I remember reading that one of the best ways for capitalism to deal with unions was to swallow them up, to make them part and parcel of the system. This is what has happened. These unions have got huge globs of money for their membership whom we must not forget include the government itself.

    In other words, the government are “negotiating” with trade unions who also represent the government.

    This has never been about Social Partnership. It has been about the unions who represent Public Sector workers helping itself to the public purse, ably abetted by a government who salivated as the unions “negotiated” the latest round of benchmarking.

    This carry on, besides being totally undemocratic, has led to near bankruptcy of the state. I don’t expect leopards to change their spots or Damascus road conversions. After the forthcoming general elections which will be totally inconclusive we will have IMF or ECB to help concentrate out minds. So, I will just sit back and wait until then!

  25. I ran the figures past an actuary, and to provide a typical Garda a full pension has a cost of about €1,000,000 give or take a few grand.

    so put a figure on it versus the private sector, and i can tell you that a public sector pension is not only good, its great, its the best. The two tiered system is a sham and the forward obligations of a Defined Benefit scheme with a public sector that is vastly overblown in size will just break the camels back some day in the future. The sad reality is that the defined benefit schemes that many are working so hard to protect will likely go broke to the detriment of the very beneficiaries who fought to defend it.

    I don’t have the answer, but all the piety of ‘poor public sector pays for their pension’ doesn’t wash with me because the figures don’t stack. disagree? then I’ll swap my pension with yours, no questions asked.

  26. Aedín

    I agree that the pension levy is a pay cut and it would have been more honest to apply it as such, however two points arise from your analysis.

    Have you factored the people who have been made unemployed in the private sector, 100% pay cut, into your analysis? Is there a comparable in the public sector?

    Furthermore, the tax treatment of a pension deduction is not the same as a pay cut. The levy is tax deductible and a salary cut is not. PRSI as an additional net cost will only arise where tax is not being paid. I understand that this may be the case for many public sector workers but not for all.

  27. @James: no, I haven’t factored in job losses. I don’t think the 8% that Karl Whelan reported George Lee to have said was the average wage cut would have either, and it was that figure I was addressing. Average wages are calculated over all workers, so average wage cuts are too.

    There is no argument that private sector workers face a risk of unemployment not faced (so far) by the public sector. But Lee didn’t say that the public sector should take pay cuts because they’re not losing their jobs, he said that they (we) should take pay cuts because the private sector are.

    On the tax treatment point, I’m confused. Say my marginal tax rate is 50%. Say I now have to pay extra €100 pension contribution. Since this isn’t taxable, my tax falls by €50. Net effect: I’m down €50. Now instead, say I have a wage cut of €100. My tax falls by €50. Net effect: I’m down €50. Tax deductibility of pension contributions is precisely what makes them equivalent. What am I missing?

    (My point about the effect of a pension levy being bigger than a wage cut of the same size goes like this: Marginal tax rate is still 50%, but on top of taxes I also pay 10% in PRSI contributions and levies, which are levied on all income, taxable or not. An extra €100 pension contribution still reduces taxes by €50 and leaves me with a net effect of -€50. A wage cut of €100, on the other hand, will cut tax paid by €50 and PRSI/levies paid by €10. Net effect: -€40).

  28. I think you are all fools for allowing the private sector to be set against the public sector. The politicians are the ones who caused this mess. Cop on to yourselves.

  29. Sorry Aedin

    I missed the fact there is no benefit attaching to state employees pension contributions in the calculation and the same applies to your PRSI calculation, because of the same point. If the contributions actually bought something not previously provided then the answer would have been different.

    For my own interest, would there be an additional benefit attaching to state employees having their pensions pegged at higher salary levels?

  30. @ James, if you are asking whether those retiring benefit from the fact that it’s been called a pension levy and not a pay cut, then you’re spot on. In fact, this was the reason the Taoiseach gave for not instituting a pay cut (after the medical card reaction, pensioners’ incomes – unlike everyone else’s – have to be preserved). This link between current public sector pensions and current pay is something that surely should be tackled immediately; pensions should be indexed to prices, not to public sector wages.

  31. The words state bankruptcy, borrowing, unemployment, trade deficits, balance of payments, social welfare, obviously mean nothing inside the Narnia world of the public sector.

    @ Karl, whether income is being taxed or levied is semantic. in reality, means people have less money!

    Accountants, economists may self obsess over whether it is a tax or levy! Instinctively, they feel some advantages might “accrue” if the formulae is applied in a particular manner. For instance, If figures are massaged they may mutate into better quality cannon fodder to throw at the truly frightening statistics of the Irish economy. it may even temporarily assuage peoples fears and give them a false hope, that the latest tax or levy will be the last one.

    Meanwhile, there actually is another economy outside of the public sector. It is the one that is shrinking all the time. In fact, the unpalatable truth is, that without this other economy, let’s call it the “shadow economy”, the salaries, pensions, job contracts etc of public servants, would be totally unsustainable and untenable. Contracts become useless pieces of paper. Terms and conditions of contracts mere good intentions if there is no money in the exchequer!

    I am getting the distinct impression that there is an arrogance in the public sector that thinks their jobs are sacred cows that will never be killed off by the vast majority of workers that inhabit the “shadow economy”. That the workers in the shadow economy, will just sit and watch as their jobs are killed off, one by one, becoming the latest sacrificial offerings to the bloated Public Sector.

    Obviously, it does not suit people on this site to have to acknowledge, that, were it not for the Irish government borrowing 50 million Euro every single day, there would not be any money to pay for the very pensions and salaries that are being sliced, diced, curried levied, taxed call it what you like.

  32. I think the whole public sector should be sacked to save €20 billion leaving a deficit of only €4 billion. Problem solved. Oh sorry I forgot that there would be a loss of tax to the exchequer and there would be an additional 370,000 people on the dole. This would bring the saving down to €12 billion and leave the deficit at €12 billion. A country with no police force, education system, health service, courts system, fire service etc and a €12 billion hole in their public finances might not impress those foreigners all that much. But we could reassure them by saying that we have a large supply of politicians, economists, journalists, auctioneers, mortgage brokers, dodgy builders and bankers and farmers on the drip from the EU.

  33. “the government has introduced a new approach to cutting the deficit—taxing people on income they don’t even earn.”

    I believe the US got there before them, sort of – taxing bonuses that were given back by AIG’s and others execs under pressure.
    http://economix.blogs.nytimes.com/2009/03/27/returned-bonuses-may-still-be-taxable/

    @Another John M – “I think you are all fools for allowing the private sector to be set against the public sector.” How quickly is benchmarking forgotten – by some. Not by the private sector, sir.

  34. Let the private sector get ready for more unemployment. Remember the public sector workers don’t keep what they get of their 50K; they spend it in shops, pubs, garages etc. They will pass on their pay cuts out of necessity rather than choice leading to more closed shops.

  35. @ jim c Says

    And when the unemployment increases in the private sector (27.6% youth unemployment and rising november 2nd) the spreads get widened by Moody’s and the National debt servicing increases. Aggregate demand falls further, more is paid out at the dole office so I would not regard it a threat that has no consequences when it is realised.

    It brings the day closer when pensions and salaries cheques simply bounce and signal the necessity of outside control. Even cheques for as low as 50,000 can bounce. There simply is no money there to play games with any longer. Why is the benchmarking dis-continued in the bad times. Very, very few people on this site have come up with any ideas for job creation being mostly academics, economists or workers in the protected public sector. No one has mentioned the “Who” of tax net widening in the sense of naming the sectors or sections of society they want brought into the tax net. The scope to rescue ourselves is getting narrower all the time NAMA will be a tipping point.

  36. When the much loved IMF come in to cut public sector wages in half they are also likely to look at the other side of the equation. Why is the tax take as a percentage of GDP so low in Ireland when compared to other European countries? I am sure they would also have a hard look at that 12.5% corporation tax rate. Those Europeans who we must obey are very keen on tax harmonisation I am told.

  37. Before I leave my reply, I will nail my colours to the Mast! Yes I am a Public Sector Worker, and I have been for the last 28 Years. I do a good job and take pride in the job I do. I never joined the public sector with the goal of becoming rich, but because I enjoy my work and it also provided me with a fair reward in my employment. BUT I AM FEED UP WITH ALL THE HYPED UP MEDIA AGAINST PUBLIC SECTOR WORKERS.
    A) I DID not get a pay rise this year
    B) MY EXPENSES are cut by 25%
    C) NO OVERTIME (So the service provided to the public has also decreased)
    D) NO New, or Replacement Staff ( So again the service provided to the public has also decreased)
    E) Pensions Levy 8.5% (Even do I always paid into my pension, but the money I pay is still not set aside for my pension)
    F) Now at last I have got the PAY CUT 6.2%
    My Income has been falling for the last year and to so I have only taken a Pay Cut in the Budget 2010 is Unfair and untrue.
    So all I ask now is will people stop bashing the PUBLIC SECTOR.
    THE real issues now are about trying to get people bacK into the work place, in good jobs that will support and reward them for working.
    Then to ensure that the people who brought us to this sorry state are held to account for their actions, and not profit from it at everyone’s cost.

  38. With the recent news from the Spending Review, its going to be interesting to see you this plays out when considering your points “What is useful here is fair analysis of the full compensation package for public servants (including pension packages and the effect of levies) in comparison with the private sector”…

  39. I Agree with fitzgerald when he says he is fed up with the media attacking the public sector. I think the state needs to look after people who work for it. After all the state should be a model employer!!

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