Wage War: Government Employees vs. Everybody Else

Feb. 21, 2011 -- Are public workers overpaid? Are their entitlements too cushy, their retirements too rich? How do they compare in overall compensation with their private sector peers?

Those questions are front-and-center now in the political war being waged in Madison, Wisc., and in such cash-strapped states as California, Illinois and New York. Recent days have seen one set of protesters—public employees fighting to hang onto pay and benefits—countered by another set brandishing signs demanding public workers get smaller pensions and agree to give-backs ("Pay Your Fair Share!").

Wisconsin Gov. Scott Walker says that government workers are the "haves" and the taxpayers are increasingly the "have nots."

Over in Milwaukee, at the University of Wisconsin, economics professor Keith Bender is watching the struggle with professional interest. Bender is co-author of a report released in April titled, "Out of Balance? Comparing Public and Private Sector Compensation Over 20 Years."

He and professor John Heywood found that wages and salaries of state and local employees are lower than for private sector workers of equal education, and further, that for the past 20 years those earnings have been in relative decline. Factoring in benefits including pensions, which in the public sector comprise a greater share of compensation, doesn't change that picture: state and local workers still have lower total compensation. Compensation for state employees, the report finds, is on average 6.8 percent lower than that earned by comparable private sector employees.

So, why has the idea gained currency that public workers are overpaid?

It's because, says Bender, Bureau of Labor Statistics data shows public sector workers making more. The problem there, he says, is that the BLS isn't comparing apples and apples—it doesn't take into account workers' level of education, which tends to be higher in the public sector. Adjust for education level, says Bender, and you find public workers underpaid.

Andrew Biggs, a scholar at the American Enterprise Institute, faults the Wisconsin study for not taking into account some of the important non-cash benefits public sector workers enjoy, such as much better job security. He and Jason Richwine, a policy analyst at the Heritage Foundation, estimate that in California, for example, a public worker's better job security equates to a 15 percent increase in compensation.

Whether or not public workers are overpaid, states facing budget crises are looking to save money any way they can, including paying public workers less, either by reducing pay, reducing pension benefits, or both. In extreme cases, public workers have woken up to find their pensions gone. Prichard, Alabama, for example, hasn't paid its retired public workers their benefits for over a year.

Private sector retirees, of course, already know how it feels to lose a pension or to see expected benefits reduced. Workers by the tens of thousands in the auto industry, in steel, and in airlines, have lost promised benefits when their employers declared bankruptcy.

Elaine Hofius worked 22 years for GM and then, after GM spun off part of its component-making operations as Delphi Corporation, another 10 years for Delphi. She retired from Delphi in 2008, expecting to enjoy the retirement that had been promised her.

She didn't get it.

After what she calls a "wonderful first six months of retirement," Delphi went bankrupt. Its pension fund was found to get greatly underfunded, and the company's pension obligations were assumed by the Pension Benefit Guarantee Corporation, which still administers them today. In all, about 20,000 salaried employees were affected, of whom 8,000 are now retired and living on reduced pensions.

Bruce Gump, director and vice chairman of the Delphi Salaried Retirees Association, says that Delphi's retires on average are having to get by on pensions between 30 percent and 70 percent smaller than what they had expected. On top of that, they've lost their healthcare benefits.

In some cases, what they're receiving from their reduced pension isn't even sufficient to pay for replacement health coverage. "It's not the kind of income that generates a comfortable lifestyle," says Gump. "We have people spending their entire reduced pension benefit for nothing but health care insurance! You still have to eat and pay your taxes."

Hofius is getting by on 35 percent less than she was promised. "I thought I'd done everything right," she says. Now she and her husband are having to draw down their savings sooner than they'd ever anticipated. "You just have to hunker down and look for ways to cut expenses." They no longer eat out.

Hofius and Gump look on the situation of Wisconsin's public workers with nothing but sympathy. It's one thing, they say, to be told when you're young that your employer isn't going to be able to make good on his promises. It's another to hear that at the end of your career. "On a personal level," says Gump, "I can absolutely understand how horrible it is to hear that the compensation you've already earned is not going to be paid back to you. It's just wrong. It feels like your life has been stolen from you. You can't go back and retake those 30 or 40 years, after you've been told they can't afford to pay what they had promised. They lied to you. They absolutely lied." Says Hofius, "I wouldn't want to see this happen to anybody."