AEI: Government Workers Are Not Underpaid

Andrew G. Biggs, a resident scholar at the American Enterprise Institute, disputes a recent study that claims state and local government workers are underpaid compared to similar private sector workers.

In an article titled “Are Government Workers Underpaid? No,” Andrew G. Biggs, a resident scholar at theAmerican Enterprise Institute (AEI), disputes a recent study by the Center for State and Local Government Excellence (SLGE) that claims state and local workers receive less total compensation than similar workers in the private sector.

Biggs writes that when accounting for employee benefits, the authors of the SLGE study used data on how much employers spend on non-wage benefits. But this causes a problem since the public and private sectors address the funding of employee benefits very differently. He explains:

“In the private sector, the amount employers spend on workers’ benefits is a good measure of what the employees themselves will receive. Most private-sector employers pay matching contributions into 401(k)-type pension plans, premiums for health coverage, and other similar benefits. Once employers have paid these costs, their obligation ends.

Not so in the public sector. In addition to health coverage and other benefits that are consumed today, most state and local employees also become eligible for defined-benefit pensions and health benefits in retirement. But state and local governments haven’t come close to fully funding these obligations. That means that the amount government employers spend today may be well less than what employees will actually receive when they retire. (Just because these benefits are underfunded doesn’t mean they won’t be paid; in most cases, payment is required by law or state constitutions.)”

State employee benefits are not only funded differently in public sector, but they are also accounted for differently. Biggs claims

“if pension funding were calculated using private-sector accounting methods—which is in any case a good approach, since we’re trying to compare public- and private-sector benefits—public pensions’ reported funding shortfall of $438 billion (as of 2008) rises to slightly over $3 trillion. To fully fund these pension promises would require annual government contributions not of 11 percent of workers’ wages, but of around 75 percent. But since these benefits will be paid, it makes sense to focus on what governments should fund, not on what they’re currently funding.”

And the same pattern also holds for retiree health benefits, which are “almost entirely unfunded.”

While the AEI scholar was “hesitant to put a total value on these unfunded promises,” the unfunded benefits should be more than enough to make up for the pay discrepancy in the SLGE study, and may in fact “leave state and local workers almost one-third better paid overall.”

You can read the entire article from Andrew Biggs here. For more commentary on the SLGE study, click here for an article from an adjunct scholar at the Mackinac Center for Public Policy, which focuses on statistical problems in the study.