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Wonk Wars: Do Public Employees Get Too Much?

September 21, 2010

By Steven Malanga

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It is truly remarkable that some commentators can so readily look past the continued polarization in how we compensate labor in this country to argue that public sector workers might be doing “too well” relative to their private sector counterparts. Most workers generally, as opposed to CEOS and the highest-paid executives, have not fared well over the past two decades in terms of sharing in the prosperity their efforts create. If they had, wages and benefits would be much higher for the typical worker and our middle class would still be broad rather than shrinking.

Private sector workers have really taken it on the chin. Inflation-adjusted real hourly wages for men are less today than 30 years ago, despite substantial productivity growth that should have made possible commensurate gains in wages and living standards. Many fewer private workers have employer-provided health insurance or pensions than in decades past. And now, those with a “winner-take-all” mentality want public sector workers to give up their hard-earned health and pension benefits.

We need to take a step back from this debate and ask where have all the gains in the economy gone since the 1980s? And how do we restore an economy that shares prosperity among all workers? We shouldn’t be making scapegoats out of our public employees. They certainly didn’t cause the economic collapse, nor are they responsible for the erosion in the wages and benefits of private sector workers.

Opening statement from Steve Malanga, Manhattan Institute Senior Fellow and author of the forthcoming book Shakedown: The Continuing Conspiracy Against the American Taxpayer

In New York State and in other states with similar problems, notably New Jersey, Illinois and California, the issue is not what public employees earn in salary and benefits versus the private sector now. In truth, we have never seen a period in America where the bulk of private workers, including most workers in private unions, earned the kind of costly benefits, including pension benefits, we now see in the public sector in New York. The tab for those benefits is squeezing government budgets, forcing taxes higher and trimming spending on other programs. As Democratic gubernatorial candidate Andrew Cuomo notes in his agenda for New York, many of the promises made to public employees are “out of line with economic reality.”

New York has a complex public retirement system with many tiers and enhancements created over the years, but the upshot is that a civilian employee in New York State can earn a pension equivalent to 60 percent of final salary after only 30 years on the job, or by 55 years of age, in addition to full health benefits in retirement. Added to this are a host of gimmicks never common in the private sector and well-chronicled last spring in a New York Times investigation, and later in a study produced by the state’s Attorney General’s office, by which employees load onto their final pensions by padding their later year salaries through a technique known as spiking.

There are stark consequences to such benefits for taxpayers. State government costs for pensions and health care for retirees, which the state provides because so many public workers retire before they are eligible for Medicare, have soared from about $1 billion in 1999 to about $6 billion. In part these costs are a result of promises made by state officials to unions when the stock market was doing well and were based on unrealistic projections of future stock market gains.

Once upon a time rich benefits were justified for public workers on the grounds that they earned less in salary than private counterparts, but that difference has long ago eroded, as numerous studies and New York and nationwide have demonstrated. Again, as the New York Times noted in its investigation: “By tradition, public employees have said they accepted lower salaries in exchange for better benefits, but the Census data show this has not been true for a number of years.”

The enormous cost of public sector compensation is turning even old friends of public unions into opponents. As Los Angeles Mayor Antonio Villaraigosa (who was once a teachers union official) has said, his city can no longer afford its rich public sector pay and benefits. Neither can New Yorkers.

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James Parrott: The average retiree covered by New York State’s employee retirement system receives an annual pension of $17,615, while the average retiree under the police and fire retirement system receives $38,367 in annual pension benefits. These benefits—which are certainly not luxurious—represent the deferred wages of public employees. It is simply not the case that, when you adjust for occupation, education and age, public employees are paid more than their private sector counterparts. Studies that claim to show higher public sector wages fail to account for the fact that public employees tend to be older and better educated than private sector workers in the same occupations.

During the late 1990s financial market boom, for reasons that did not make long-term good fiscal sense, the employer contributions to public pension plans in New York were dramatically reduced, in some instances, to zero. That fact, together with volatile markets, go a long way toward explaining why pension contributions that have to be made by the state and local governments are what they are today.

The fact remains, in this horrendous economic and budget climate, many observers are pointing the finger at public employees, and acting as if their benefit costs are the main driving force behind our budget deficits. The dynamic bears too much resemblance to the national level where budget deficits largely caused by the Great Recession and tax cuts for those in high income brackets leads to renewed calls for cutting back Social Security.

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Steve Malanga: Public employees have been resistant in New York and other states to changes in their benefits packages, and especially to pensions, that would bring them into line with economic reality and relieve long-term burdens on taxpayers. Unions argue instead that any significant changes are part of a ‘race to the bottom’ in which retirement benefits in general in the U.S. are declining. They point to the small savings rates of some private workers who have 401(k)-style pensions and argue that public workers deserve a better retirement.

But these criticisms ignore the fact that there are retirement systems in place which have been shown to provide workers with a decent retirement at an affordable cost to the employer, systems that cap the employers’ long-term liability and are more resistant to political pressure than the current system.

Federal employees, for instance, are covered by a system instituted in 1986 which includes a basic guaranteed pension, a thrift savings plan which is similar to a 401(k) in which both the government and the employee make tax free contributions that build up over time, and participation in Social Security. The thrift savings plan has the added benefit of being portable, meaning that if an employee leaves government service the accrued benefits go with him or her. That’s significant when you consider that nearly half of all public school teachers leave the profession within 10 years.

In addition to the federal plan, some 15,000 universities and colleges participate in retirement programs managed by TIAA-CREF in which the institutions and their employees contribute to defined-contribution retirement savings programs that allow employees to enjoy a satisfying standard of living in retirement, but which cap the long-term liability of the employer. Few people would contend that both federal employees and those enrolled in TIAA-CREF plans are somehow being exploited or shortchanged, yet public worker unions in places like New York have tenaciously resisted similar plans by claiming they would somehow undermine the retirements of their workers.

State and local governments now face somewhere between $3 trillion and $5 trillion in future liabilities for pension and health benefits that are out of line with economic reality. It is entirely possible to provide government workers with a competitive level of benefits without overburdening taxpayers or squeezing money out of other programs. It’s time for sensible reform.

Original Source: http://beta.wnyc.org/articles/its-free-country/2010/sep/21/wonk-wars-public-employees/

 

 
 
 

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