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Why Government Sees Higher Wages and Benefits
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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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