Pampered Public Employees
Why Government Sees Higher Wages and Benefits

Does the public sector get pampered?

When you control for the differences in characteristics like education and age, the federal government has salaries that are 12 percent higher than similar private sector workers.

You're aware that some studies have come the opposite conclusion: that federal workers are underpaid. Why are they wrong?

The government has produced numbers where they claim that federal workers are underpaid by 22 percent. We say they're overpaid by 12 percent. The difference is in the methodology. We looked at the same person -- based on age, education, all those things -- and put him in the federal government or the private sector. The government looked at the same job in the federal government vs. private sector.

They looked at jobs. You looked at people. Why does the distinction matter?

Because government promotes faster, and at a younger age, than the private sector. The federal government is saying "our senior accountants earn less than a senior accountant in the private sector." But somebody who might be a junior accountant in the private would be senior in federal government. For many people, getting more responsibility at a younger age is a reason to go to the government.

The issue of public sector compensation has become increasingly salient, especially the question of whether state pensions are too generous. What's your take?

It's true that many state pensions are disproportionately high. But it's not as simple as it seems. If you look at what employers pay toward employee benefits -- including health and pensions and vacations -- it looks the same. But the benefits are not the same. In the private sector, you get defined contributions. In the public sector, you get defined benefits.

Let me explain that. So let's say a public and private sector employer puts $5,000 toward pensions for each employee. In the private sector that goes into 401(k) and an individual can either get a low risk/low benefits return by investing in government bonds, or higher expected return with a larger risk. In the public sector, the government promises high return and takes all risk. So a public sector worker with same amount of money going into pensions, and higher benefits, but less risk. That's how a public sector employee can get benefits twice as high for each dollar of contribution as a private sector worker.

Some government employees don't participate in Social Security. How does that change the benefits picture?

Right, I've heard some folks on the left say, "OK but these public employees don't get Social Security." But see, that's irrelevant because they're neither paying nor receiving benefits. If you follow Social Security, you know it pays a low rate of return. A typical person pays more in taxes than they get back in benefits. For them not to participate in Social Security is actually a benefit, because they're keeping more.

Let's assume that there is a public/private pay gap. So what? Money attracts talent and we want a talented federal work force. For example, we can't expect the SEC to have good bank regulators if they offer pittance.

You're raising an important point. The pay gap difference between federal and private jobs is not uniform. In general, the pay premium is very large for low skilled workers, and small or negative for highly skilled workers, like your SEC regulators. But most people don't have MDs or PhDs. Up through a Masters, you'll find on average that people make more in the federal government, especially at the low end with folks like paper clerks.

But you'd acknowledge that sometimes it makes sense for the government to pay super-competitively?

I don't have any issue with paying people what they're worth. You want to get qualified people. You gotta pay competitively, but we're paying more than competitively.

What would you say is the total cost of overpaying federal workers? What would competitive paying save us?

I'd say $40 billion in overpayment a year. Four hundred billion over ten years. That's a lot of money. It won't fix Social Security with that, but it's a lot of money.

My big point is that you can't have a protected sector of people who are getting better pay and benefits, who are unfireable. Private sector workers are five times more likely to get laid off. Is that good? Does that level of job security breed the best performance for the tax payer dollar? I haven't seen compelling reasons why you need such different sets of rules in the private vs. public sector.

Andrew G. Biggs is a resident scholar at AEI.

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About the Author

 

Andrew G.
Biggs
  • Andrew G. Biggs is a resident scholar at the American Enterprise Institute (AEI), where he studies Social Security reform, state and local government pensions, and public sector pay and benefits.

    Before joining AEI, Biggs was the principal deputy commissioner of the Social Security Administration (SSA), where he oversaw SSA’s policy research efforts. In 2005, as an associate director of the White House National Economic Council, he worked on Social Security reform. In 2001, he joined the staff of the President's Commission to Strengthen Social Security. Biggs has been interviewed on radio and television as an expert on retirement issues and on public vs. private sector compensation. He has published widely in academic publications as well as in daily newspapers such as The New York Times, The Wall Street Journal, and The Washington Post. He has also testified before Congress on numerous occasions. In 2013, the Society of Actuaries appointed Biggs co-vice chair of a blue ribbon panel tasked with analyzing the causes of underfunding in public pension plans and how governments can securely fund plans in the future.

    Biggs holds a bachelor’s degree from Queen's University Belfast in Northern Ireland, master’s degrees from Cambridge University and the University of London, and a Ph.D. from the London School of Economics.

  • Phone: 202-862-5841
    Email: andrew.biggs@aei.org
  • Assistant Info

    Name: Kelly Funderburk
    Phone: 202-862-5920
    Email: kelly.funderburk@aei.org

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Wednesday, April 23, 2014 | 12:00 p.m. – 1:30 p.m.
Graduation day: How dads’ involvement impacts higher education success

Join a diverse group of panelists — including sociologists, education experts, and students — for a discussion of how public policy and culture can help families lay a firmer foundation for their children’s educational success, and of how the effects of paternal involvement vary by socioeconomic background.

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Getting it right: A better strategy to defeat al Qaeda

This event will coincide with the release of a new report by AEI’s Mary Habeck, which analyzes why current national security policy is failing to stop the advancement of al Qaeda and its affiliates and what the US can do to develop a successful strategy to defeat this enemy.

Friday, April 25, 2014 | 9:15 a.m. – 1:15 p.m.
Obamacare’s rocky start and uncertain future

During this event, experts with many different views on the ACA will offer their predictions for the future.   

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