In Britain, Austerity Collides With Pension System

http://www.nytimes.com/2012/09/21/business/global/in-britain-spending-outpaces-austerity.html

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LONDON — It may be the age of austerity for many in Britain. For a former doctor, Geoffrey Lipman, it is anything but.

Dr. Lipman’s annual government pension of £48,000, or nearly $78,000, nicely supplements the £144,000 tax-free payment he received when he retired from Britain’s National Health Service in 2007 after 35 years of service.

He also makes use of the wide menu of universal benefits available to older Britons — including free bus travel and annual payments of £200, or $324, to defray winter heating costs. Next month, when he turns 65, he will qualify as well for a second government pension payout of £104 a week, plus a £10 bonus at Christmas.

Dr. Lipman’s payments are emblematic of what Britain’s Conservative prime minister, David Cameron, is up against, having hitched his political fortunes to the coalition government’s ability to cut the national budget. Despite Mr. Cameron’s efforts to curb public outlays and reduce one of Europe’s biggest budget deficits, government spending is higher than when he took office two years ago. This continues a climb that began with the creation of the British welfare state after World War II.

The cuts Mr. Cameron has made — a public sector pay freeze, a reduction in outlays for local governments and cutbacks in personnel at government ministries, to name a few — have drawn howls of protest. The outcry has come from unions; the Labor Party, which now has a strong lead in the polls; and even a growing faction of Tory-supporting business leaders.

But overall government spending, as a portion of the economy, continues to rise. It is projected to approach £700 billion this year, or about 45 percent of gross domestic product, compared with 38 percent a decade ago. That is partly a result of social benefits, mainly for the elderly, that are deemed politically off-limits and are being propelled up by a demographic curve that will add millions of Britons to the retiree ranks in coming years.

“Austerity is just not a word that I recognize,” said Dr. Lipman, who since retiring from full-time work as a family doctor in the northern city of Leeds has upgraded the car he drives to a Mercedes. “I would not say that I am worried financially.”

The issue in some ways parallels the challenge facing the United States, where growing numbers of retiring baby boomers threaten to bankrupt the Social Security and Medicare systems within decades unless those systems are revamped. And as in the United States, because people still working are paying for retirees’ benefits that are more generous than younger people can expect to receive, the budget struggle has elements of a generational dispute.

Younger doctors in Britain do not expect to receive the same benefits as Dr. Lipman. This year they held a one-day strike to protest the government’s decision to raise their retirement age and their pension contributions.

In Britain, “the welfare state can no longer carry this burden,” said Angus Hanton, an economist and a member of the advisory board of the Intergenerational Foundation, which advocates on behalf of younger Britons.

With British tax revenue remaining weak because of an economy that is forecast to shrink 0.5 percent this year, it is becoming ever more likely that Mr. Cameron’s government will miss its goal of cutting the deficit this fiscal year to £120 billion, from £126 billion last year.

The International Monetary Fund estimates that Britain will have a deficit this year of 8.1 percent of G.D.P., surpassing Spain and even Greece and trailing only Ireland among the distressed euro zone economies.

Opposing politicians — and some economists — have accused Mr. Cameron of destroying any chance for economic recovery by sticking to his austerity platform. He faces growing pressure to reverse course.

“We have not gone far enough — you can keep the welfare state as long as you have economic growth, and this is not happening,” said Tim Morgan, an economist at the brokerage firm Tullett Prebon in London who tracks government spending patterns.

For now, many bond investors are disregarding Britain’s deficit. Continuing to see the pound as a haven from woes in the euro zone, they are lending money to Britain for 10 years at an interest rate only slightly higher than Germany’s 1.6 percent.

But at least one hedge fund manager, Ben Davies of Hinde Capital, is betting against British bonds. “The government has this austerity program, but spending and debt continue to increase,” Mr. Davies said. “It’s very disingenuous, and I think by the end of the year the market will question whether the government can truly implement these cuts.”

Driving this increase has been spending on entitlements, which Mr. Morgan calculated to be 50 percent of spending last year, if interest payments on government debt were not counted. Benefits for Britons older than 60 are substantial. Retirees receive the winter heating payments regardless of income or where they live, even in the not-so-chilly south of France or coastal Spain. When they turn 75, retirees no longer have to pay the annual £145 fee that other British households pay for using a television.

Many economies in Europe, of course, say they are under pressure from benefit payments and are making cutbacks. But the strain on the British Exchequer is particularly intense because the benefits include some of the most generous pension plans in Europe. That is especially so for retired government employees.

According to research by the Intergenerational Foundation, about 100,000 public sector retirees receive pensions that exceed the country’s average annual wage of £25,900. Those ranks are expected to increase sharply in coming years as more senior government workers retire.

Not all of the 670,000 people collecting pensions from the National Health Service live at Dr. Lipman’s level. Many were lower-paid health service professionals — including support staff and nurses — who receive close to the national public sector pension average of £7,000 a year.

But the foundation’s research found that the richest payouts went to retirees from the health profession, with some doctors receiving pensions of as much as £100,000 annually.

“The total liability for these government pensions is £1.3 trillion,” or more than $2.1 trillion, said Mr. Hanton, the economist who helps advise the Intergenerational Foundation.

The Cameron government has put in place changes that will require younger working doctors to increase their pension contributions to 14 percent of their salary by 2014. Dr. Lipman had to contribute 4 percent from the £100,000 a year he earned on average as a doctor.

It has also put in place the second increase in doctors’ retirement age since 2008, raising it to 68 from 65. It was 60 when Dr. Lipman left the work force.

Because this year’s changes affect only doctors younger than 47, any near-term savings will not be substantial. The effect is most profound on the doctors themselves. That is why the British Medical Association called for a strike in late June, the first time doctors here had taken such action in 40 years.

“We are really angry,” said Dr. David Wrigley, 43, who works in the Lancashire region of northwest England.

Under National Health Service guidelines, for his 15 years of experience, Dr. Wrigley qualifies for a yearly salary of around £85,000, about $138,000 at today’s exchange rates. He acknowledges that even with the new rules, doctors will remain well compensated compared with other public sector professions.

But he says the latest changes seem to single out doctors.

“When you first joined the N.H.S. you signed a moral contract to work until you are 60 and then get your pension,” Dr. Wrigley said. “Now that is being taken away.”

But not from retirees like Dr. Lipman, whose pensions will not be affected.

“We have a lifestyle that is very good,” said Dr. Lipman, who is married and has two grown daughters. “We just got back from Tuscany, we are going to Portugal in three weeks, the Canary Islands for New Year’s and are planning a trip to South Africa after that.”

That, he concedes with a chuckle, is the beauty of a legacy-style N.H.S. pension. “You get paid £48,000 a year to do nothing.”

<NYT_CORRECTION_BOTTOM> <p>This article has been revised to reflect the following correction:

Correction: September 20, 2012

<p>An earlier version of this article misstated the frequency of £200 payments to older Britons to defray winter heating costs. They are yearly, not monthly.