Who Are These Public Workers, and How Much Do They Cost?

The Center on Budget and Policy Priorities has provided an article by Elizabeth McNichol: Some Basic Facts on State and Local Government Workers. This paper provides a tally of what roles these workers perform, how many there are, and how large is their compensation compared to the private sector.

By far, most public workers are in the business of providing education services to our children. The next largest category is protective services, which includes police officers, fire fighters and correctional officers.

The number of public employees has not changed much over time as a fraction of the population. What growth has occurred has been in the area of educational services.

McNichol provides this summary:

"....the number of non-education workers remained about the same relative to the overall population until declining somewhat after 2008. Since August 2008, the total number of state and local government employees has declined by 662,000."

Nothing is more contentious and confusing than the wild claims made about public employee wages and total compensation. The actual situation seems rather simple and unsurprising. Even with benefits included, public-sector workers earn less than private-sector workers with similar education, job experience and other characteristics. The public sector unions do what they do best and protect the lower income workers from having wages that fall too low, but the higher income workers do not keep pace with their private-sector counterparts.

"The Center for Retirement Research at Boston College, widely recognized as an authoritative source on retirement income issues, recently found that total compensation for public-sector workers — including the value of benefits — is 4 percent less than that of comparable private-sector workers."

It is not surprising that wages and benefits make up a significant fraction of state and local budgets.

"Wages and salaries make up about one-third of state and local governments’ general spending, on average, according to Census Bureau data. States spend a considerably smaller share (about 15 percent) than local governments (41 percent)."

"Spending on benefits such as health insurance and retirement is not reported to the Census but can be estimated using data from the Bureau of Labor Statistics. Adding these costs brings the total costs of compensation for state and local workers to about 44 percent of state and local spending. Some 20 percent of state spending is for employee compensation, compared to about 55 percent of local government spending."

So, benefits, including retirement, add 5% to state budgets and 14% to local government spending. On average, benefits add about 33% of the wage to the compensation of the typical worker. This seems rather tame in a fiscal sense. So what is the big problem?

The big problem is that states and local governments are probably not contributing enough to the employee pension plans to cover the cost of future retirement payouts.

While there are exceptions where greed and poor management have allowed situations to get out of control, the problem mainly arises because commitments were made at a time when potential earnings from traditional investments in stocks and bonds were much higher. Most pensions are based on anticipated earnings of 7.5-8.0%. Consider this chart provided by The Economist.

Over a span of nearly 40 years, pension funds could obtain earnings near their targets merely from investing in government bonds. Now returns from government bonds are bouncing around in the vicinity of 2%. Couple this with equity markets that have been essentially flat for over the last decade and one recognizes the problem: where are the earnings going to come from?

We discussed this issue of pension plans and earnings in Pension Plans and the Quest for Earnings: CalPERS and Canada. There we reported that any admission that future returns on investment would fall below the targets leaves the plans vastly underfunded. A change in CalPERS’s earnings target from 7.75% to 7.5%, seemingly minor, has tremendous leverage on state and local budgets. For example, that would translate to a 12% increase in pension costs for Santa Clara County in California.

The problem is further exacerbated by the fact that the plans have not been meeting their mark in recent years, and governments have chosen not to, or have been unable to, increase contributions to cover the shortfall.

Where does this leave us? Wishful thinkers believe the pension plans can up their earnings sufficiently by pursuing ever riskier investment strategies. In a world of winners and losers some may succeed, but it is likely that most will not, and the situation could become even worse. The private sector is rapidly eliminating defined benefit pension plans in favor of defined contribution plans such as 401Ks. This is truly a cop-out because they do not pay enough into the plans themselves to provide a significant benefit, and few people have enough extra money to salt away in the plans to make a difference.

Most governments seem to have responded by keeping their plans in place, but cutting retirement benefits and raising required contributions by employees. This is a reasonable approach if pursued with fairness in mind.

If one steps back and puts public employees and their diminished retirement prospects in context with private-sector workers and their diminished retirement prospects, one can only conclude that we, as a country, are in deep trouble. Forcing people to work longer until they retire is not good for the economy when youth unemployment is such a large problem, and it is probably not good for productivity. People will have to retire and they will have to have enough income to support themselves. Social Security is not adequate as a source of retirement income.

The obvious conclusion is—we need a National Pension Plan to supplement Social Security.