Why do government employees have a separate pensions fund?

Question

In many countries government employees have a separate pension fund that pays out better than the one accessible to the general public. Likewise civil servants often go into retirement earlier than their counterparts in private sector employment.

What's the reasoning behind this? Why treat government jobs any different in terms of retirement? For example, why can't Federal employees in the US rely on Social Security when they retire (as do millions of private sector employees), rather than having a separate pension system?

Answer 1

Employees, both in the private and public sector, often get complicated pay packages that include monthly salaries, pension entitlements through different schemes, medical benefits, and other allowances. In many parts of Europe, the public sector pay contains a higher percentage of deferred entitlements and a lower percentage of immediate cash payouts. An engineer or lawyer in the public sector often earns less than a similar qualification in private practice would, but they get job security and future payouts ...

This is similar to big property holders effectively self-insuring. A company with a thousand buildings might not take fire insurance because their own pool of risks is diverse enough that damages should even out over short timeframes -- no need to pay the overhead and profits of an insurance company. The public sector can afford to "self-insure" the retirement of their employees by paying less now and more later.

In a way that sounds logical. One trusts the public sector to pay pensions 30 or 50 years from now, where private companies would be asked to pay immediately into some sort of more or less secured pension scheme, or directly to the employee who invests himself/herself.

In another way, such things can get out of balance if average life expectancies change and pension ages do not keep up, or if the average pension entitlement in the private sector changes.

Answer 2

The definitions of deferred versus immediate payouts in o.m. answer are excellent. The explanation for why the public sector puts more emphasis on deferred payouts only covers the 'nice' aspects though.

Politicians are only humans and not in power indefinitely. In democratic countries often only a couple of years. If you promise say a fireman a mediocre pay right now but a very generous pension later on, he will usually trust the promise and evaluate the offer accordingly. The voter who will have to pay for the pension in some decades unfortunately will not. Shifting the cost of some public service some 20 or 30 years into the future is an excellent vote winner for politicians in a lot of cases. Get the benefit of the spending now but the cost will only kick in when you are long out of power. If people where perfectly rational this wouldn't work but in the real world they are not and it does.

Edit: Quotes were requested in the comments, which will be difficult. Even politicians who deliberately make deals like that will not say so in public. But one can observe various examples in practice where policies were made that have vastly higher cost at some time far in the future then the benefit they give now.

Public American pension schemes are an example. These are vastly underfunded and where so for decades. Nevertheless only now politicians are slowly starting to be criticized for it. Almost all climate policy or more accurately lack thereof can be seen this way.

Answer 3

Government operations (like that of the largest private sector corporations) are often rather complex, and it requires a relatively stable workforce to manage things properly.

Corruption can also be a concern in many kinds of government employment.

Back-loading a lot of remuneration well into the future is a way of promoting stability and discipline in the workforce.

For the public sector in general, which would otherwise bear the cost of managing unemployed or sickly older workers in their final years, the reckoned net cost of providing a pension is also much lower than for a private sector employer (who can rely on throwing such workers onto the state, free of any cost to the business).