NCPA - National Center for Policy Analysis

Cadillac Pay in the Land of Lincoln

November 9, 2011

It's very likely that Illinois public employees receive a pay premium over similar private sector workers, says Andrew G. Biggs, a resident scholar at the American Enterprise Institute.

Based on 2005-2010 data from the Census Bureau's Current Population Survey, Illinois state and local workers receive salaries around 5.8 percent below those of private sector workers with similar education and experience.  But public sector benefits are a lot more generous than those in the private sector.

  • Let's say you had an Illinois state employee who retired at age 65 with 30 years of service and a final salary of $60,000.
  • His annual pension benefit would be around $29,160.
  • For this, he contributed about 4 percent of his working salary, although in some cases the contribution is "picked up" by the employer.
  • From 1992 to 2003, it seems that most Illinois state employees paid no pension contribution, and many still do not.

Now let's see what that same worker might get from a 401(k), which most private sector workers have.

  • Let's assume he contributed the same 4 percent of pay and his employer contributed 3 percent, which is fairly typical in the private sector.
  • Let's also assume he invested in government bonds, since he wants a guaranteed benefit to match the public sector defined-benefit plan.
  • This would provide him with a retirement annuity of around $4,450.
  • In addition, he would receive a Social Security benefit of around $22,700, for a total of $27,150.
  • Illinois public employees generally don't participate in Social Security.

About even, right?  Except that to get the Social Security benefit a private sector worker has to pay an additional 6.2 percent of his wages.  So the private worker contributes 10.2 percent of pay for a pension of $27,150 while the Illinois government worker contributes 4 percent (and sometimes less) for $29,160.

To produce the same pension as the stylized Illinois public employee illustrated above, a private sector worker would have to increase his 401(k) contribution from 4 percent of salary to more than 40 percent.  So it appears very likely that generous public sector pension benefits are more than enough to make up for a modest public sector salary penalty in Illinois.

Source: Andrew G. Biggs, "Cadillac Pay in the Land of Lincoln," The American, November 4, 2011.

For text:

http://www.american.com/archive/2011/november/cadillac-pay-in-the-land-of-lincoln

 

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