Yesterday Eileen Norcross participated in a panel discussion that was co-hosted by the American Enterprise Institute and the Mercatus Center. The event included two panels, one discussing the case for pension reform, and the second discussing the politics of reform for conservatives.
Drawing on their previous research in pension reform, the panelists made a convincing case for the need for a shift away from defined benefit public pensions. Unfortunately, none were particularly optimistic that drastic reform measures will be undertaken. Scott pointed to Utah as a model states relative to others for responsible pension fund management but said that even their reforms do not go nearly far enough.
Andrew Biggs of AEI presented testimony on his recent research with Jason Richwine on public sector compensation. They estimate federal workers receive a 14 percent salary premium and a 23 percent benefits premium compared with workers in the private sector, for an overall premium of 39 percent, or $60 billion annually. Their analysis controls for skills and experience by comparing federal workers with their counterparts in the private sector. As they authors state, federal compensation is neither “obscenely generous nor does it leave federal workers substantially underpaid.” By paying federal workers the same as their private sector counterparts, there are are some savings to be found. But as Andrew notes, finding the premium is easier than fixing it. Market flexibility would permit adjustments – raising salaries when demand for the position is low, and lowering salaries when the demand for the job is high.
Here is a link to the GAO report I referenced. If you think the budget gaps of the last few years have been bad, you ain’t seen nothing yet: States face a $9.9 trillion shortfall over the next several decades.
In order to close these long-term gaps, the GAO estimates that states need to immediately cut 12.3 percent (or increase taxes by the same amount) and maintain these changes each and every year for the next 50 years. To put that in perspective, last year states cut 5.9 percent out of their General Funds (total spending, which includes borrowed funds, other state funds and federal funds actually increased!). So, as painful as the last few years have been, states are nowhere close to doing what they need to do in order to address their long-term problems.
Professor Shaiken mentioned studies that find public-sector employee pay is comparable to private sector pay. Here is one such study. And here is another.
Here is Andrew Biggs and Jason Richwine from yesterday’s Wall Street Journal on why these studies are flawed. To wit: a) they typically don’t account for health benefits, b) they fail to accurately compare the value of guaranteed 8 percent returns in public pensions with 4 percent guaranteed returns in private 401(k)s, and c) they do not take account of greater job security among public sector workers. Here is a link to Biggs and Richwine’s analysis. Here is Veronique de Rugy on the matter. Here is Megan McArdle. Here is a New York Times graphic that focuses just on Wisconsin employees (counting only cash compensation, the median Wisconsin public employee–who is typically more-educated–earns 22 percent more than the median Wisconsin private employee).
Here is a paper that assesses the empirical link between public sector unionism and government spending.