Economics, Entitlements

Responding to Jonathan Cohn on Public Sector Pay and Pensions

pay

I’ve written a great deal recently about both public-sector pay and public pension finances. Jonathan Cohn defends public-sector workers on both issues in a recent post at the New Republic. Cohn makes a number of points I agree with, a couple points that I disagree with in a fairly minor way, and mentions a larger issue that I think is more important.

Cohn begins with several studies claiming that state and local employees are underpaid relative to private-sector workers. These issues are complicated and I can think of a number of reasons these results might be overstated. But if you accept the basic methodology of those papers—I basically do, and I’m taking it that Cohn does as well—then you’d also have to accept the conclusion in my recent Wall Street Journal piece with Jason Richwine that federal workers are significantly overpaid. Moreover, Cohn cites my AEI blog post arguing that higher benefits for state and local workers make up for lower salaries. While you can’t say this is so in every case, given the diversity of pay arrangements in state and local governments around the country, I’m confident it’s true for the majority of employees. And to this higher overall compensation you’d add greater job security and other benefits.

Second, Cohn points out (citing Dean Baker) that many public-sector workers don’t receive Social Security benefits. But it’s not that these public employees are paying for Social Security and not getting anything. Rather, these workers neither pay nor receive benefits. As I argued here, this generally works in their favor, since Social Security is a money-loser for the typical participant and more so at the earnings levels of typical public employees. And to the degree that Social Security will require higher taxes or lower benefits in the future to maintain its solvency, public employees are exempt from this pain.

But here’s the more important point. Cohn asks, “To what extent is the problem that the retirement benefits for unionized public sector workers have become too generous? And to what extent is the problem that retirement benefits for everybody else have become too stingy? I would suggest it’s more the latter than the former.” In other words, the problem isn’t public-sector workers ripping off the taxpayer so much as private-sector employers ripping off private-sector employees.

This isn’t impossible, but it also doesn’t strike me as very likely. Workers’ share of economic output has been roughly constant over time, from 74 percent of non-financial corporate value added in the 1970s to around 74 percent today. And the share of worker’s compensation going to employer pension contributions is slightly higher today than in 1975 (11 percent versus 8 percent). Changes in the age structure of the population may have shifted the underlying meaning of these figures a bit, but it seems clear to me that we haven’t seen a wholesale demolition of private-sector pensions.

Yes, pensions have shifted from defined benefits to defined contributions, and this means that workers bear more investment risk. But it also means that pensions are portable, so younger and middle-aged workers aren’t screwed if they change jobs. And it also improves incentives to delay retirement, so we don’t have workers retiring in their 50s when they can and should work longer. Moreover, as I’ve argued in several places, generous public-sector defined benefit plans look affordable only due to accounting practices that don’t pass the economic smell test, and would be illegal in the private sector in any place.

So at the end of the day I think we’re back where we started: which is with a legitimate question whether public-sector pay and pensions are justifiable given the services provided and the resources available to taxpayers and the government.

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