Jim O’Leary: Taxpayers should be unhappy with pay commission report

Value of public service pensions not properly taken into account

Minister for Public Expenditure and Reform Paschal Donohoe: hoping to avoid big rise in public pay levels. Photograph: Collins

The report of the Public Service Pay Commission published earlier this week is part of a process, the process of navigating a course towards a new public sector pay agreement.

As such, the report is not the work of an independent entity. It is the work of an entity embedded in the process, an entity essentially "owned" by the parties to that process: the Department of Public Expenditure and Reform on the one side, and the Public Services Committee of ICTU on the other.

The report’s purpose, as I see it, is to provide a repository of research that is acceptable to the parties and that will facilitate the next stage of the process, the negotiations around the size and phasing of pay increases and related matters.

The report is designed to narrow the grounds for dispute between the parties. It does so, in the first instance, by setting out the considerations that matter in relation to determining public sector pay (the state of the public finances, equity between the public and private sectors, recruitment and retention), by presenting the salient data in respect of each of these considerations, and then by providing a layer of analysis and interpretation of the data.


The hope is that the list of considerations, the data assembled and the data analysis performed will not be contested when the pay talks proper begin in the next few weeks.

Sense of urgency

One senses in the reaction of trade union leaders to the report, in particular in their sense of urgency about moving to the next stage, that the report has been successful in this regard. There has been no great wave of outrage at its findings.

Of course, an outsider to the process, an interested taxpayer for example, may see things rather differently and may find plenty to take issue with in the report’s analysis and conclusions.

An example is the commission’s analysis of public-private earnings differentials. The purpose of such analysis is to assess whether public servants are paid more than their private sector counterparts on a “like-for-like” basis, that is when allowance is made for characteristics like age, education, experience and so on.

Most of the research carried out on this issue over the past 10-15 years has pointed to a sizeable public sector premium, that is a situation where, on a like-for-like basis, public servants are paid more than private sector employees. Not surprisingly, the more recent research indicates that the premium has declined since the onset of the financial crisis

The results of this sort of exercise are quite sensitive to the vector of characteristics included and also to other elements of the estimation technique, such as whether earnings are measured on a weekly or hourly basis.

The PSPC report, in fairness, enters the caveat about sensitivity, but gives prominence to a set of estimates of the public sector premium that are biased downwards by the inclusion of a trade union membership variable and the use of weekly rather than hourly earnings.

As a result, the PSPC suggests that the public-private earnings differential, estimated to be in the range 13-20 per cent in the early 2000s, had shrunk to virtually zero by 2014. This is a usefully “neutral” conclusion in so far as it may remove the issue from the agenda, but is it valid?

Generous pensions

Another aspect of equity as between the two sectors relates to pensions. Public service workers in general enjoy much more generous pension arrangements than private sector employees. Following the reforms introduced in 2013, it may no longer be the case that all public servants are blessed with Rolls Royce pensions, but most of them still are. Those that aren’t, enjoy what might be described as the equivalent of BMWs or Mercedes.

The best that private sector employees can hope for are in the latter class, but most private sector workers who have any occupational pensions at all are in modest vehicles like Golfs and Micras.

Then there is the very large fraction of private sector workers who either look after their own pension arrangements or have no occupational pension provision whatever. Many of these folk are in the horse-and-cart class.

In making comparisons between the two sectors, should the latter groups of private sector workers be included or not? The PSPC has judged that they should not be. As a result, the value it attaches to public service pensions relative to the private sector is greatly understated.

Public sector pensions are an enormous issue, not only on equity grounds, but also on grounds of cost. Compounding the cost problem (and also the equity problem) is the fact that they are not funded, but paid for out of general taxation.

Facing a future of ever lengthening human longevity and a rapidly aging population, not to mention the very considerable threats to the tax base that arise from the likes of Brexit and Trumponomics, policymakers need to think long and hard about the public service pension bill and how it might be contained.

Of course, the pay bill is not exempt from this sort of adjuration. Reflecting on the existential threats now posed to Ireland's economic model of the past 50 years, Chris Johns, a columnist with this paper, wrote a few months ago that we should be putting the public finances on a war footing, by which he meant freezing current spending and taxes.

It might not be feasible to freeze public sector pay at current levels but, if I were Minister for Public Expenditure and Reform Paschal Donohoe, I would be aiming for an outcome to the pay talks as close to that as possible.

Jim O’Leary is an economist who resigned from the first benchmarking body before it published its report in 2002. He can be contacted at mail@jimoleary.ie