Good Benefits

by Reihan Salam

I don’t have much to say regarding Mike Konczal’s interview with Greg Anrig, a former correspondent for Money, author of The Conservatives Have No Clothes: Why Right-Wing Ideas Keep Failing, and a vice president at The Century Foundation that doesn’t reflect arguments Charles Blahous has already made in his recent commentary. It’s not clear to me that Anrig has paid close attention to the Simpson-Bowles plan to increase the minimum benefit and benefits for the oldest-old seniors, and Anrig offers characterizations of the health and tax proposals that I find problematic. Regardless, Anrig is a smart left-of-center journalist, as is Mike, and his opinions are always worth a look. 

What I did very much appreciate was one of Mike’s questions:

As for the “everything else” category, I noticed that the proposal really hits hard on government workers. There’s ample evidence that government workers are underpaid in cash (though they receive good benefits) relative to if they were working in the private sector, yet they come under pressure in this proposal. [Emphasis added.]

I was very impressed by this, as it represents major progress from what we’ve been hearing from many left-of-center critics citing recent studies from the Center on Wage and Employment Dynamics at the University of California-Berkeley and EPI. What we had been hearing was that government workers were undercompensated, which, as Andrew Biggs explains, appears to be wrong.

The basic problem with CWED’s treatment of benefits is that it assumes data showing what employers currently pay toward benefits is equal to what employees will actually receive. In the short-term, this assumption is fine, since many employee benefits are consumed today. But in the public sector, a large share of compensation is deferred to retirement in the form of pension benefits and retiree health benefits. The CWED study significantly underestimates the value of deferred benefits.

As many people are aware, public sector defined-benefit pension plans are significantly underfunded. Using private sector accounting standards, which is necessary to make apples-to-apples comparisons, the typical public pension is less than 50 percent funded. When pensions are underfunded, compensation from pensions is underestimated.

Basically, pension obligations in many states are what you might call super-senior to all other obligations. These “good benefits” mean that public sector workers are quite well compensated relative to private sector workers:

Using data from the Pew Foundation, I calculated how much each state would need to put aside each year, as a percentage of workers’ wages, to fully fund their retiree healthcare. For California, the answer is around 12 percent of pay, among the highest in the country. Accounting for retiree health coverage would increase total compensation by around 8 percent, pushing the total California public pay advantage to around 18 percent.

To be sure, California is just one state, and conditions vary. But imagine if we also increased current cash compensation on top of deferred compensation and non-cash compensation.  

This is certainly one agenda that progressives might pursue. Speaking as a non-progressive, I think that this is the wrong way to go, for at least some of the reasons that progressive Matt Yglesias suggested back in September.