Undercover Economist

March 25, 2011 11:42 pm

Pension reform: just the job?

Should we attract the best people into public service, or prefer they favoured the private sector?

Reading the coverage of Lord Hutton’s review of public service pensions, you could be forgiven for concluding that he had recommended that existing public sector workers should have their pensions cut. Not so.

Every commentator seems to believe either that Hutton’s proposals (not to be confused with those of Will Hutton, on fair pay) are wonderful because public sector workers are over-pensioned, or that they are dreadful because public sector workers are losing perks they deserve. If we were all assigned to be “public sector workers” or “private sector workers” on leaving school, this debate would make sense. Since we aren’t, it is nonsense.

People can and do move between public and private sector. Two friends of mine are in the process of making that move, in opposite directions. Disillusioned bankers can become teachers; NHS nurses can work in private nursing homes. (In some cases the move is harder than in others.) Pay and pension will naturally affect such decisions.

So the question is not whether some immutable clique of public sector workers should get more or less money in future, because public sector employment is available to everyone. The real question is whether we’d like to attract the best people into public service, or would prefer that they favoured the private sector.

This is not a question about the moral worth of public versus private, but about where smart people generate more value. I’d like the very best doctors and teachers, but also the very best engineers and middle managers. Since not every sector can have all the best people, there’s a question of balance.

And the balance has real effects. A study by Emma Hall, Carol Propper and John Van Reenen found that NHS staff were paid less well in London, relative to the private sector alternatives, than they were in northern England. The result was that London NHS trusts tended to over-promote staff and rely on agency staff – and there was a substantial increase in the patient death rate as a result. Skimping on public sector pay can be deadly.

But it’s possible to under-reward private sector workers instead: we need competent accountants, plumbers and farmers, too. (I am aware that high pay does not guarantee competence – step forward the banking industry – but it should at least give recruiters a better choice of candidates.)

Lord Hutton’s big ideas, then, translate as follows. In future, public sector employment should be less attractive, and so some competent people will be tempted into the private sector. In addition, the last few years at the top of the public sector (head teachers, police commissioners, Whitehall mandarins) will be less of a pension bonanza, making it more likely that these people will leave early to seek high-paying jobs in the private sector.

In short, Hutton would like the quality of private sector workers to rise relative to the quality of public sector workers, especially for the higher echelons. Is that a good idea? I haven’t a clue.

There is one aspect of Lord Hutton’s proposals that does seem unambiguously sensible: the idea that future public pensions will be paid out later by default. Rather than altering the balance between public and private sectors, this proposal tilts the playing field in favour of keeping experienced public servants in their jobs, and away from paying them to sit on the beach for almost as long as they spent in the workforce.

Fiddling with the relative pay of public versus private sector workers is a matter of fairness only in the short term. In the long term, it’s about deciding which parts of the British economy most urgently need talented people. Although Lord Hutton’s supporters and critics do not use this language, that is what is really at stake.

Tim Harford’s latest book is ‘Dear Undercover Economist’ (Little, Brown)

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