Andrew Biggs of AEI wrote an excellent piece earlier this month, and I apologize to all of you for not posting it sooner — it’s tremendously helpful for understanding the ongoing debates over public sector compensation.
With regard to the gap between state and local compensation and private sector compensation, Biggs makes three basic points:
(1) When you look at salary alone, state and local workers are paid somewhat less than their private sector counterparts when you correct for education and work experience. The same kind of calculation yields salaries that are higher for federal employees when we correct for education and work experience, which is one of many reasons why the federal wage freeze proposed by the president is a sound idea, though one would hope for more flexibility (e.g., one hopes that the plan will be to freeze the overall wage bill, but allow salaries to vary across job categories, individuals, etc.).
(2) When you factor in retiree health benefits, which were not counted in the BLS survey that has been the basis for many compensation comparisons, the gap closes.
(3) And it is important to keep in mind the effective rate of return on pensions:
Roughly speaking, a given dollar of public-sector contributions implies risk-adjusted retirement benefits around 2.4 times as high as in a private defined-contribution plan. So, if the typical public-employer pension contribution equals 7.2 percent of worker pay, the actual compensation generated is equal to a private-sector contribution of around 17.3 percent. So the other approaches miss approximately 10 percent of pay. The precise amount differs from plan to plan, but is too large to ignore.
I should emphasize that though the national conversation has been focused on federal workers, state and local workers are a vitally important part of the picture, as Biggs explains: there are 15 million state and local workers, who receive approximately $850 billion in pay. Containing the growth of public sector compensation is essential to achieving long-run fiscal sustainability.