Why We Need to Re-Think Public Employees’ Compensation

Traditional public pensions widen the public-private pay gap, and they aren't a good fit for a younger government workforce.
September 29, 2014
By Thom Reilly  |  Contributor
Chancellor of the Nevada System of Higher Education and a former county manager

Pensions -- except for one's own, of course -- seldom rank high on Americans' list of hot topics. But the Great Recession and the huge debt surrounding public employees' pensions have thrust this complex and rather arcane issue into the spotlight.

Which is where it belongs. Nationwide, unfunded liabilities for public-sector pensions and retiree health care range anywhere from $1.4 trillion to more than $4 trillion, depending on the assumptions used. And looking ahead, there's good reason to conclude that current public-pension plans will not fit the needs of younger generations of public workers.

The national debate over public pensions raises a number of key issues, including fairness, transparency, the proper role of government and the sanctity of the free market. The bottom line, however, is the bottom line: Are public-sector workers making out better than their private-sector counterparts? The answer, according to a new model of private-versus-public-sector lifetime compensation, is yes.

Taking a new approach to the ongoing debate, I constructed a public-versus-private-sector model to gauge the cost of lifetime compensation. The model, measuring total wealth accumulated during both active-employment and retirement years, includes three types of workers:

• A private-sector employee with a typical 401(k) retirement package.

• A public-sector employee with a defined-benefit pension plan plus Social Security income.

• A public-sector worker with a defined-benefit plan but no Social Security income.

Two sample occupations were reviewed: administrative assistants (white-collar workers) and engineers (professionals).

The results: For both occupations, total lifetime compensation of an average public employee was higher than that of the private-sector counterpart. While pre-retirement compensation levels were comparable between the two sectors for the administrative assistant and higher for the private-sector engineer, the retirement benefits of public-sector employees for both occupations were far greater than those of their private sector counterparts. This was not only because public-sector retirement payouts are more generous but also because public employees can retire on average five years earlier than private-sector workers.

Over the years, benefits have become a growing portion of total compensation for public employees. Elected officials have often favored more-enhanced benefits packages in lieu of salary increases because it has been politically easier: Benefit-package increases are less visible to the public, and the costs can be spread out over time.

But there is a growing conviction among policy experts that it may be time to reevaluate how we compensate public employees -- that public pay is too heavily skewed toward deferred compensation, which can hide a full accounting of the costs from the public while pushing a significant portion of those costs onto future generations.

In addition, these plans may no longer be the best choice for today's younger and more mobile workforce. Most defined-benefit plans, for example, are not portable. Thus, many workers feel constrained to remain with one employer, no matter how unhappy or unproductive they are. Other types of plans -- such as defined-contribution, cash-balance and hybrid -- may be much more appealing to workers who desire more flexibility with their retirement accounts.

The model described here clearly does not end the debate on comparative compensation. But it does offer a different perspective on the growing disparity between the retirement costs associated with public-sector workers and those of their private-sector counterparts at a time when there is growing political resistance to preserving retirement benefits for public employees that are far more generous that most private-sector workers can ever hope to enjoy.

The paramount challenge for policymakers is to design sustainable compensation systems that ensure recruitment and retention of quality public workforces while providing protection for retirees. Some hard choices are certainly ahead. But it's time -- if not well past time -- to take them on.