Should Government Employees Receive Different Retirement Benefits Than Private Workers?

The California Foundation for Fiscal Responsibility (CFFR), a public pension reform group, has just launched an online discussion of pension issues and solutions. As part of this online debate, the organization’s Web site now features a Question of the Week about various pension issues, and visitors are invited to offer their responses. The site will also continue to provide links to news articles, commentaries, and academic and policy studies on the topic. In addition, CFFR has posted a couple of alternative pension reform proposals and welcomes financial analysts, pension managers, policy experts, taxpayers/members of the general public, and other stakeholders to offer their criticisms, suggestions, and other input in the hopes of helping to eventually craft a pension reform measure that could be put on the ballot in the event that the California legislature continues to fail to act on this enormous and critical issue facing the state.

Here I offer my take on the site’s first pension Question of the Week:

Should California’s public employees have different retirement benefits than workers in the private sector?

No, California’s public employees should not have significantly different retirement benefits than workers in the private sector. Simple fairness requires that public-sector and private-sector employees should be compensated as equally as possible for similar work. (This goes for wages as well as for retirement benefits.) To do otherwise would be to create a privileged class of workers, which is precisely what state and local governments have done in establishing significantly higher levels of benefits–and wages as well–for government workers. The political strength of labor unions and the collusion between labor unions and politicians who share their ideological or pragmatic goals and/or rely on labor union support for their election prospects has resulted in an increasing disparity in public-sector and private-sector compensation. This inequity is now spilling over into a form of class warfare as taxpayers have begun to realize the magnitude of the problem and the difficulty in paying ever more for government workers while struggling to meet their own household budgets and save for their own retirements.

The original justification for higher public-sector benefits was that governments could not afford to pay salaries as high as those in the private sector, so greater benefits and job security were needed to attract quality employees for government jobs. Now, however, government workers typically earn significantly greater salaries than their private-sector counterparts (see here, here, and here, for example)–and they continue to enjoy much greater benefits and ironclad job security on top of that.

In addition to the excessive compensation levels for government workers, the very nature of the defined-benefit plans utilized ubiquitously in the public sector contribute to the unpredictability and high costs of the pension system. The heavy reliance on annual pension fund returns makes contribution levels volatile and the ability to either fudge the many actuarial assumptions required (i.e., how much the pension fund will return on average, what inflation will average annually, what salary increases will be, how soon workers will retire and how long they will live, etc.–all projected out decades into the future) or simply be wrong about these assumptions makes it too easy to hide or underestimate actual costs. By contrast, defined-contribution plans would simply require the employer/government to put away a relatively fixed percentage of payroll (typically with a matching provision up to a certain level) each year and allow the employee to be responsible for the investment of his or her retirement funds.

Notice that the private sector has been shifting from defined-benefit plans to 401(k)-style defined contribution plans for the past 30 years or so, and that hardly any new defined-benefit plans have been created in the private sector in at least the last 10 or 15 years. (A look at the effects of the combination of strong labor unions and defined-benefit plans on the steel industry, airline industry, and, most recently, the domestic auto industry will reveal why this is so.)

This is why state and local governments must switch to defined-contribution systems and set pay and benefit levels comparable to those received in the private sector.

Additional Resources:

” Reason study: How California’s Public Pension System Broke (and How to Fix It)

” Reason article: “Comparing Private Sector and Government Worker Salaries”