NCPA - National Center for Policy Analysis


June 15, 2010

A recent research paper by Keith Bender and John Heywood of the University of Wisconsin-Milwaukee, argues that employees of state and local governments earn salaries and benefits significantly lower than similar private-sector workers.  However, this study omits unfunded pension and retiree health benefits for public-sector workers.  Once unfunded promises are included, state and local employees may receive significantly greater total compensation than private-sector workers, says Gregg Opelka, a resident scholar at the American Enterprise Institute. 

Most private-sector employers pay matching contributions into 401(k)-type pension plans, premiums for health coverage, and other similar benefits. Once employers have paid these costs, their obligation ends.  Not so in the public sector, says Opelka: 

  • In addition to health coverage and other benefits that are consumed today, most state and local employees also become eligible for defined-benefit pensions and health benefits in retirement.
  • However, state and local governments have not come close to fully funding these obligations.
  • Just because these benefits are underfunded does not mean they will not be paid; in most cases, payment is required by law or state constitutions. 

Given the data available, it is not easy to precisely calculate the effect of unfunded benefits on public-sector compensation.  Nevertheless, there is an attempt to shake the numbers out, starting with defined-benefit pensions.  For example: 

  • As of 2006, pensions were funding only around 9 percent of the required 11 percent, leaving a gap of 2 percent of pay that is unfunded.
  • That does not sound like much, but it's also increasingly understood these figures are a significant underestimate of what pensions truly should be funding.
  • As of 2008, public pensions' reported funding shortfall of $438 billion rises to slightly over $3 trillion.
  • To fully fund these pension promises would require annual government contributions not of 11 percent of workers' wages, but of around 75 percent.  

Since these benefits will be paid, it makes sense to focus on what governments should fund, not on what they are currently funding.  Now, there may be some reasons to scale these estimates back a bit.  But the generosity of public-sector pension and retiree health benefits and the degree of underfunding mean that looking only at what government employers currently pay toward benefits isn't representative of what government employers -- and the taxpayers -- ultimately will pay for these benefits, says Opelka. 

Source: Andrew G. Biggs, "Are Government Workers Underpaid? No," The American, June 9, 2010. 

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