Public versus Private Pay Study: New Theory

"A new report sponsored by a pension-reform group provides unprecedented new data on the cost and value of public retirement benefits in California and compares the compensation and benefits with similar employees in the public and private sectors.

The researchers used an unprecedented and insightful new methodology that could become the "Rosetta stone" for evaluating public vs. private sector retirement benefits. They calculated the present value of benefits paid by the employer, netting out the employees' contributions and taking into account the time value of money. Although it can probably be refined, this is a giant leap forward in research methodology for evaluating pension benefits, which often are compared on the basis of what the employer contributed in the last federal pay survey. The latter is virtually worthless as a data source because of wide disparities in how public and private employers record costs under different accounting standards. Previous researchers also ignored the fact that most public employers are underfunding their retiree health benefits by paying only the retiree's bills and not funding current employees' benefits actuarially.

The authors objectively point out that different job classifications provide different results and different conclusions. Teachers, for example, receive far less value in pension benefits than police officers. Some public employers have been more generous than others, as well. California cities tend to provide more generous retirement benefits than other public employers (except for the state's prison guards, who enjoy immense and costly political privileges). In the private sector, different job categories get relatively better pay and benefits, so the researchers were careful to avoid excessive generalizations. Nonetheless, they did find that in many occupations in their study, public employees are paid at least as well as private workers, and in many instances even better — plus they typically receive retirement benefits three times more valuable and costly than their private sector counterparts.

The report was immediately attacked by unions. Rather than evaluate the information itself, the union publicity shop resorted to slurring the funding sources and the researchers' own public pensions from their prior employment. These new studies show, however, that the traditional wisdom about public sector compensation has been eclipsed by actual practices in some quarters. The state pension fund also assailed parts of the report, putting itself in the questionable role of defending legislative policies rather than administering them. (Whatever happened to the classic civil-service and public-administration "policy/administration dichotomy," folks?) While I continue to maintain that most public employees nationwide are still paid less in cash than their private counterparts, new reports like this one have shown clearly that the pension and retiree medical benefits are so valuable that many public employees are now getting a pretty sweet deal and in some cases, reforms will be required.

I now wonder whether any more compensation studies will shed much light on the important issues in the retirement reform debate. The two sides have dug in, and the average voter is unlikely to sift through the footnotes of these reports to draw an informed opinion. What is probably more important at this stage is the fiscal numbers: the magnitude of the funding problem, what it will take to fix it and who pays what share, when. Most unions want voters to believe that (1) it's not really a problem in the first place, as the financial markets will somehow, someday magically solve the funding deficits as they have in the past, and (2) the public employees have already sacrificed enough. But the voters' mood has shifted strongly on these issues this year. Recent surveys show a majority in favor of pension reforms, reductions in benefits for new employees to align with private-sector standards, and higher contributions by today's public servants. Public support for retirement reform may wane in coming years, so management's best opportunities to achieve truly sustainable policy changes may arise in the coming year.


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