Gannett newspapers of Wisconsin ran an investigative report this weekend on public employee pay, which cited my study with Jason Richwine of the Heritage Foundation. We found that Wisconsin public employees receive total pay and benefits roughly 20% above what workers with similar education and experience receive in the private sector. In contrast, other studies, such as the Economic Policy Institute’s, written by Rutgers professor Jeffery Keefe, found a small public employee pay penalty.
The main debate is over how we calculate the value of public employees’ pension benefits, which are both generous and guaranteed against market risk. We found that to produce the same level of benefits with the same level of risk as a Wisconsin state worker receives, a private sector worker would need to invest almost 24% of his pay in a 401(k) holding government bonds. Since the typical private sector worker gets an employer 401(k) contribution of about 3% of pay, that’s a pretty big difference.
In response, Keefe told Gannett, “Basically they calculate it in a way that to me makes no sense.” Keefe calculates employees “pension compensation” simply by looking at how much the government contributes to the public employee pension each year. These current contributions are low, because public pensions invest in risky assets with high expected returns.
But here’s the problem: A government’s contribution to its employees’ DB pension plan doesn’t settle the obligation it owes to them. If the plan’s investments fail to generate the assumed 8%, then the government – meaning, the taxpayer – is legally on the hook to make up the difference. As the Bureau of Economic Analysis wrote, “This obligation represents an additional source of pension wealth for participants in an underfunded plan.” Once you measure this full value of public employee pensions, total public sector pay looks significantly better.
The fact that the BEA, academic studies, the Federal Reserve, and the Congressional Budget Office view things as we do doesn’t settle the issue, but it does show that we’re not just making this stuff up.