Public vs. Private

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Are public employees paid more than equivalent private sector employees? Several recent studies suggest they aren’t, but AEI’s Andrew Biggs thinks those studies are flawed. He’s willing to accept their conclusions about basic wages, but thinks their estimates of future retiree benefits are off. California, as usual, is the example du jour:

As many people are aware, public sector defined-benefit pension plans are significantly underfunded. Using private sector accounting standards, which is necessary to make apples-to-apples comparisons, the typical public pension is less than 50 percent funded….A good guess of true public pension compensation is to divide the reported pension contribution of 8.2 percent by the 50 percent funding level of California pensions, producing a value for promised pension benefits of 16 percent of compensation. This increases the 2 percent pay advantage that the CWED study already acknowledges to a public sector pay premium of around 10 percent.

….There’s also another factor contributing to the flawed interpretation of data: Retiree health benefits aren’t counted as worker compensation. Most public employees receive free or subsidized health coverage after they retiree, a benefit that most private sector workers do not get. Given how early most public employees retire and the high cost of health insurance for older individuals, this retiree health coverage can be worth several hundred thousands of dollars over the course of their lifetimes….How much is this coverage worth? Using data from the Pew Foundation, I calculated how much each state would need to put aside each year, as a percentage of workers’ wages, to fully fund their retiree healthcare. For California, the answer is around 12 percent of pay, among the highest in the country. Accounting for retiree health coverage would increase total compensation by around 8 percent, pushing the total California public pay advantage to around 18 percent.

The form of this argument strikes me as basically sound because I’ve had the same reaction to all these recent comparisons of public and private sector pay: they seem OK on wages and current benefits, but don’t appear to fully take into account the value of future benefits. At the same time, I’m not sure that using the 50% underfunding figure is entirely justified since a lot of that is based on losses suffered recently by pension funds during the housing crash. If investments recover over the next few years, pension funds may turn out not to be as underfunded as we think right now.

As for the retiree healthcare benefits, I’d certainly be interested in seeing some other folks try to calculate this stuff. In general, though, I find Biggs’s 8% figure easy to believe given the skyrocketing cost of healthcare. But whatever the right number is, it ought to be taken into account.

Anyway, I hope that some of the organizations that have produced these reports respond to Biggs. It’s a conversation worth having, and it would be nice to at least get everyone on roughly the same page about which numbers to include and how big they are.

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