Civil servants should be offered higher pension payments if they take their pension later than 60 to encourage more officials to stay in work for longer, a high-profile economist has said.
Offering public servants an actuarial enhancement in exchange for delaying the age at which they take their pension would be a “virtually costless” way to encourage older people into work, Paul Johnson, director of the Institute for Financial Studies, said.
Johnson, who was chief economist at the Department for Education from 2000 to 2004 before a stint as a Treasury director, said the civil service pension he accrued during his eight years in Whitehall “will pay out an annual sum not far off the state pension I’ll have earned after more than 45 years in work”.
Writing for The Times, the think tank head said despite having “no intention, nor indeed the financial wherewithal” to retire at 60, he will have “effectively have no choice” but to start claiming his civil service pension at that time.
This is because there is no incentive to do so, he said. “I will get the same annual amount, inflation adjusted, if I take it at age 60 or 67. It’s a no-brainer,” he said.
“This is absurd. It’s not going to affect my retirement decision – I didn’t accumulate enough pension – but it is a clear signal to thousands of others that 60 is the time to go, or at least to reduce their working hours,” he added.
He compared this to the arrangements for his private pension, which means he will get a better annuity rate, should he decide to purchase an annuity, the longer he defers taking the pension; and the actuarial enhancement he will get on on his state pension if he delays taking it until after state pension age, which means he will take it for a shorter time but get a higher annual payment.
Allowing civil servants – as well as other workers who accumulate public sector pensions – to defer their pension in exchange for a similar actuarial enhancement would encourage more officials to stay in their jobs past 60, according to Johnson.
If the enhancement were calculated correctly, the cost to the government in payments will be “nil”, he said.
“There might be a small cost in reduced tax receipts – those who currently take their pension while earning might be paying a higher rate of tax on the pension in payment – but even a small positive labour-supply effect would be likely to offset that. And in the short run it would be all good news for the exchequer – lower pension payments, more work. It’s not often that there are costless win-wins in public policy, but this is one of them,” he said.
If civil servants do decide to defer taking their pension, they receive the arrears paid as a lump sum once they retire, which Johnson noted has a “painful implication for tax”.
Civil servants who take partial retirement can start taking their pension while working past 60. However, they must reach an agreement with their employer to “reshape” their job to reduce their pensionable earnings by at least 20% – such as by reducing their working hours – to do so.
Returning to work after retiring could mean officials lose some of their pension, depending on whether their pension and earnings add up to more than their pensionable earnings in the 12 months before they started drawing their pension.
The “obvious conclusion” of these rules is that “60 is the time to cut and run”, Johnson said.
Johnson also made the case for wider reform of public sector pensions, which together cost the exchequer nearly £60bn a year and which he said “are not good value for money”.
“We know that many public sector workers would prefer more pay up front. Some don’t even join the schemes at all, despite their considerable value, because they don’t feel they can afford the employee contributions. All in all, generous pensions at the expense of lower pay is not an efficient route to recruitment and retention,” he said.
He added: “There is a lot of unfinished business here. Grasping this particular nettle could help, just a little, with many of the government’s stated priorities: stabilising the public finances, improving public services, enhancing growth, and increasing labour force participation. There aren’t many things over which it has such direct control and where there are such obvious wins.”
