Overpaid Public Workers: The Evidence Mounts

April 12, 2012

When the public pay debate began to simmer two years ago, Andrew Biggs, a resident scholar at the American Enterprise Institute, and Jason Richwine, a senior policy analyst at the Heritage Foundation, were among the few analysts to show that many public employees -- federal, state and local, including public school teachers -- are paid more than what their skills would merit in the private economy.  Their core insight was that public-sector pensions are several times more generous than typical private-sector plans, but this generosity is obscured by accounting assumptions that allow governments to contribute far less to pension plans than private employers must.

Public-employee unions and left-leaning think tanks dismissed Biggs' and Richwine's analyses, but now several government agencies have weighed in with analyses that strongly support their original insight.

  • The Bureau of Economic Analysis has announced that, beginning in 2013, the National Income and Product Accounts of the United States will calculate defined-benefit pension liabilities -- and the income flowing to employees in those plans -- on an accrual basis that reflects the value of benefits promised, regardless of the contributions made by employers today.
  • At current interest rates, this adjustment would roughly double reported compensation paid through public pensions.

The Congressional Budget Office endorsed a similar approach last month in a new report on federal employee compensation, which found that the federal retirement package of pensions plus retiree health care was 3.5 times more generous than private-sector plans, contributing to a 16 percent average federal compensation premium.

Even more recently, an analysis by two Bureau of Labor Statistics economists, published in the winter 2012 Journal of Economic Perspectives, concluded that the salary and current benefits of state and local government employees nationwide are 10 percent and 21 percent higher, respectively, than private-sector employees doing similar work.  This study didn't even factor in the market value of public-pension benefits, nor did it include the value of retiree health coverage.

Basic fairness requires that public employees be paid for their skills at the same market rates as the taxpayers who fund their salaries and benefits.  In some states accommodations have been struck, but in others further confrontation remains likely.

Source: Andrew G. Biggs and Jason Richwine, "Overpaid Public Workers: The Evidence Mounts," Wall Street Journal, April 10, 2012.

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