The Wall Street Journal reports this morning that “Public Employees Get More Benefits,” which is of some interest to me, given what I’ve written on public-sector pay and benefits. The Journal article is in some ways misleading, in others nonsensical. But it does hit at a core point.
The article begins by pointing out that
As of March, 88% of state and local government workers had access to employer-sponsored medical plans, compared with 71% of private-sector workers, according to a Labor Department report released Tuesday. Governments also picked up a larger share of the health-care tab. Public employers paid 89% of the premiums for policies covering individual workers as of March, compared with 80% at private-sector companies.
That seems to point to greater generosity of benefits and thus to possible overcompensation of state and local employees. But these comparisons fail to account for the fact that public-sector workers are, on average, more white-collar than private-sector employees. If you compared benefits provision to white collar jobs, things would appear more even. Likewise, in the private sector large employers generally provide better benefits than small employers. If the public sector—which is, after all, a large employer—were compared to other large employers the differences in benefit provision would shrink further. So I’m not sure we infer a ton from these numbers alone.
The Journal then follows with a claim that’s common, but which has never made much sense to me (italics mine):
The more generous benefits given to government workers are part of a larger trade-off, according to economists. Unable to match private-sector salaries for their most valued workers, governments instead offer more-attractive benefits packages.
Think about that claim for a second and it becomes clear why it makes no sense. Benefits cost money just the same as salaries cost money. If I pay you $10,000 less in salary but $10,000 more in benefits, my wage bill is exactly the same as before and I haven’t saved a penny. Of course, if the public sector didn’t offer such generous benefits, maybe it could match private-sector salaries. The point is that what matters is overall compensation, and unless there’s some magic to how benefits are provided then the public sector’s preferred mix of salaries/benefits isn’t a cost saver.
The only way this trade-off works is if state and local governments are promising workers benefits that governments are not currently paying for. As it turns out, this is exactly what is going on. State and local employees receive significantly larger pension and retiree health benefits than private-sector employees, but the costs of these benefits fail to shows up in official statistics due to dodgy accounting and chronic underfunding.
Public employees receive pensions that are about twice as large for each dollar of contributions as do private-sector employees. That is, assuming each worker (and his employer) contribute a given amount toward pensions each year, public-sector workers receive a guaranteed benefit at retirement that’s about twice as high. As I’ve argued elsewhere, this is a result of bogus pension accounting at the state level, which allows state pensions to assume they can earn high investment returns without risk. As a result, public pensions are underfunded by more than $3 trillion. Nevertheless, it’s the taxpayer, not public-sector retirees, who bear the costs of this.
Second, more than 80 percent of public-sector workers are eligible for retiree health benefits (often referred to as OPEBs, or Other Post-Employment Benefits), versus only around one-third in the private sector. OPEBs generally provide full coverage from the time a government worker retirees (often in their early to mid-50s) up until Medicare starts at age 65. After age 65, public employees usually receive a supplementary policy that covers what Medicare doesn’t. (Private-sector retiree health coverage, where it exists, is generally less generous, with higher deductibles and co-pays.) These benefits are almost entirely unfunded, and as a result don’t show up at all in Bureau of Labor Statistics data about employee compensation. Nevertheless, the Pew Center on the States reports that states currently owe around $500 for OPEBs, which costs rising rapidly in the future. That means that public-sector employees have effectively received an additional $500 billion in deferred compensation that is currently off the books.
Comparing salaries between public- and private-sector employees is a relatively straightforward process. Comparing benefits is much less so. Nevertheless, despite some shoddy reasoning in today’s Wall Street Journal article, there’s a good case to be made that public-sector benefits are significantly more generous than those paid to the typical American worker.