Public Employee Salary/Benefits Growth

Andrew G. Biggs of AEI released a paper examining the last 20 years and here is what I took from it:

The median state in 2017 provided an employer-funded pension benefit worth 14percentof employee wages. (page 2)

The EPI studies equate employee pension compensation in a given year with the government pension contribution in that year. However, those annual contributions are largely unconnected from the pension benefits earned by employees in that year and can dramatically misstate employee compensation paid via pension plans. For instance, some states have skipped pension contributions entirely in a given year, yet employees continue to accrue benefits. Likewise, a state might reduce its annual pension contribution by assuming a higher rate of return on pension investments, but this does not change the value of benefits that must be paid in the future. (page 4)

From 1998 through 2017, the private sector workforce grew by 16 percent, from 109.7million to 127.4million. Over that same period the federal civilian workforce grew by 18 percent, state and local government non-education by 14 percent and state and local education by 17 percent. (page 9)

Federal employees, with average annual salaries exceeding $88,000, stand out relative to the other three sectors where average salaries range from $47,204 in public education to $55,890 in private sector jobs. However, in the public sector annual benefits are significantly more generous than in private sector jobs: in dollar terms, benefits in state and local government and public education are roughly twice as generous as in private sector jobs; in the federal government, benefits are nearly four times as generous as the private sector in dollar terms. (pages 9-10)

Salary growth in state and local government and public education has lagged that of the private sector. Over twenty years, average private sector wages rose by 15 percent above inflation while state and local government pay rose by 8 percent and public education by 5 percent. Average federal salaries, however, increased by 23 percent above inflation from 1998 to 2017. Benefit growth was far more rapid in public than private sector jobs. The real value of annual employee benefits including pension accruals grew by 39 percent in the private sector from 199 to 2017. Public education benefits grew by 84 percent, state and local government benefits by 90 percent, and federal employee benefits by 116 percent. The faster growth of public sector benefits made up for slower salary growth in state and local government and public education, allowing for slightly faster growth of total compensation. In federal employment, rapid growth of benefits combined with rapid growth of salaries to produce total compensation that increased substantially more than in any other sector over the past 20 years. (pages 22-23)

17 responses to this post.

  1. Posted by Anonymous on April 11, 2019 at 7:49 pm

    Oh goody! More numbers.

    This should keep us busy for a while. First thing that jumped out at me was the decrease in normal cost of benefits for New Jersey, especially between 2010 and 2016..

    And… The relative generosity rank, especially in 2016

    Look out for caveats such as this throughout the day report…

    “While these data do not tell us if federal, state and local, and public education employees were appropriately compensated in 1998, relative to the average private sector employee public sector workers became better compensated over the years 1998 to 2017.”

    Reply

    • Posted by Tough Love on April 11, 2019 at 8:06 pm

      Quoting …………….

      “And… The relative generosity rank, especially in 2016”

      lol ……………that is when compared to other (also excessively compensated PUBLIC Sector workers). The comparison should be to those who PAY that compensation …… mostly PRIVATE Sector Taxpayers.

      Reply

  2. Posted by Anonymous on April 11, 2019 at 8:37 pm

    Couldn’t find the 20 year T-bill rates that Biggs used in his 2014 paper, or the discount rates NIPA used to compare normal costs, but this graph is the 30 year treasury rate, which is indicative of the trend.

    The biggest factor in the increase of normal costs, as I understand, is changes in this discount rate. Keep in mind the caveat: “these data do not tell us if federal, state and local, and public education employees were appropriately compensated in 1998,…”

    If we assume they were appropriately compensated, the lower interest rates between 1998 and 2017 are the reason for the rapid increase in “normal costs”.

    If they were appropriately compensated in 1998, at approximately 5 percent, what were they (we) compensated in the period from 1970 to 2000?

    And what will they be when/if rates increase?

    This should be interesting.

    Reply

  3. Posted by Anonymous on April 12, 2019 at 11:02 am

    What am I reading wrong?

    Table 3 says private sector wages rose much faster (15%) than public wages (8%).

    Looking at several samples in table 4, (Alabama is a good example), public wages grew much faster than private. I believe Biggs said all these numbers were adjusted for inflation.

    Which is correct?

    Reply

  4. Posted by Anonymous on April 12, 2019 at 11:46 am

    “Real average wages per employee grew by 15 percent in the private sector between 1998 and 2017. Private sector wage growth outpaced wage increases in state and local government and public education, which may have led to the perception that state and local government and public school teachers have become underpaid.”

    ” The 2000 to 2016 period encompassed both some pension benefit enhancements enacted early in the period and subsequent pension retrenchments, including both less generous benefits for newly-hired employees and higher employee contributions, often for both current employees and new hires.”

    Example, California state miscellaneous workers pre-2000 formula was 2%@60. From 2000 to 2012, the formula was 2%@55. From 2012 to present, the formula is 2%@62.

    Applying these formulas to worker retiring at age 62 with 35 years service, we get, respectively…

    79.52% of FAS
    82.81% of FAS
    70% of FAS

    So, we get lower growth in state wages compared to private, and reduced pensions as a percent of the (lower) wages. (Plus higher employee contributions.)

    “which may have led to the perception that state and local government and public school teachers have become underpaid.” (Biggs)

    So why does Biggs say total compensation of public workers has increased relative to the private sector? I don’t see it in my pocket.

    Two words… “discount rates”, as per NIPA, 6 percent in 2000; 4 percent in 2017.

    Biggs:
    “…it appears that the 1998 to 2017 NIPA series began with a 6 percent nominal discount, gradually declining over time to a current rate of 4 percent. Lower interest rates increase the cost and value of pension liabilities, in real terms as well as expressed through actuarial valuations. It is more costly to promise a guaranteed benefit in future years if the interest rates on safe investments have fallen. Likewise, such a guaranteed benefit is more valuable to participants in a low interest rate environment.

    And there you have it. Do I understand this correctly, John?

    Reply

    • I haven’t gone through detail on Biggs’ numbers since I have a prejudice against using government figures – especially when they come to pension funding – and drawing conclusions.

      Reply

      • Posted by Anonymous on April 12, 2019 at 12:42 pm

        I don’t disagree.

        I was most interested in the change in wages, I have heard “opinions” that public wages are increasing faster that private. This is something Biggs should be good at researching. Too bad the two tables don’t seen to agree.

        And Biggs statement that pension “formulas” increased in the early 2000s, then retrenched after 2009 seems to agree with Munnells study and my own observations that pensions have not increased as a percent of salary.

        But the big kicker, according to Biggs, is the NIPA difference in discount rates, from 6 percent to 4 percent. Don’t think of it as a 2 percent decrease. It is a 33 percent decrease.

        “Oh Boy! That’s Where My Money Goes”
        Mel Tillis

        Reply

    • Posted by Tough Love on April 12, 2019 at 12:26 pm

      I didn’t find any Note in Biggs study indicating whether Safety workers (e.g., Police) were excluded from the Public Sector data ……….. like THIS guy:

      https://www.sfchronicle.com/bayarea/otisrtaylorjr/article/Vallejo-police-chief-will-walk-away-with-a-13761301.php

      Reply

      • Posted by Anonymous on April 12, 2019 at 1:11 pm

        Disgusting person and what a coward….leaves amidst a scandal within his department of officers using excessive force and lethal force……but I bet the council members will all get similar deals maybe with smaller amounts and they wonder why CA will fall off the financial cliff……..a coward in my opinion

        Reply

        • Posted by Anonymous on April 12, 2019 at 6:29 pm

          Disgusting yes. Coward? It is not cowardly to take a deal like that. Disgusting that the council(in cohoots with them I’m sure) did that. Doesn’t mean he is cowardly. Just means he doesn’t deserve what he is getting. Not by a long shot.

          Reply

          • Posted by Tough Love on April 12, 2019 at 7:54 pm

            To put some figures to the “generosity” and cost of a $19,000/Month COLA-increased pension, assuming that he lives to age 84 (based on a recent SOA mortality study of Public Sector retirees …. and specifically, Safety workers):

            If we assume as 2% annual Cola increases, the up-front cost to purchase that stream of payments or it’s present value (PV) is $5.734 Million.

            If we assume as 3% annual Cola increases, the up-front cost to purchase that stream of payments or it’s present value (PV) is $6.671 Million.

            Do you think the City’s Taxpayers would allow this if they REALLY had a choice ?
            —————————————–

            The $ amount payable at the beginning of each MONTH was closely approximated by using $ ANNUAL total payable at each midyear.

          • Posted by Tough Love on April 12, 2019 at 7:57 pm

            Forgot to mention …………. the above PV’s were calculated by discounting the mid-year-assumed annual COLA-increased payments at 4% interest.

          • Posted by Anonymous on April 13, 2019 at 5:16 am

            He is a coward to leave when he did….left the department in the lurch. Don’t know if his officers are guilty or not but by him leaving when he did certainly suggests something was rotten in that town…..just MHO

  5. Posted by geo8rge on April 13, 2019 at 4:45 am

    You should have included the first sentence of the next paragraph.

    “… but this does not change the value of benefits that must be paid in the future. These methodological issue are discussed in greater detail below.

    This article does not intend to resolve all these questions. ” But they may be correct, NJ’s unfunded liability may never be funded or paid out, so it should not count as compensation paid.

    The are many articles about the lack of real wage growth (I think they are using nominal growth). I also have to wonder if comparing the average salaries of the top tier in the private sector with state workers makes sense, I suspect variance or standard deviation is way way larger in the private sector. I also wonder how at the bottom of the private sector how welfare, medicaid ect. is taken care of.

    Reply

    • Posted by Anonymous on April 13, 2019 at 10:52 am

      This is a “working paper”:

      “Often, authors will release working papers to share ideas about a topic or to elicit feedback before submitting to a peer reviewed conference or academic journal.”

      Would be interesting to see the feedback.

      My biggest questions…

      In text, Biggs says private wages have increased 15 percent, while public has increased only 8 (23 percent for federal? Bizarre.)

      The tables don’t seem to verify that, unless I am reading them wrong.
      ———————–
      Pension “generosity” seems to be stable or declining, either as percent of wages, or in dollar amounts, adjusted for inflation.
      ————————
      Pension “generosity” is not the reason for spiralling costs in the last decade.
      ————————
      The elephant in the room is decreasing interest rates. The obvious solution is to switch to defined contributions for all public employees prospectively. Then start handing out some big wage increases.
      ————————-
      If all pensions now “cost” more or are more “valuable” to the recipient, due to lower corporate bond yields, or Treasury yields, what, if anything, does that say about the cost of Social Security?

      Reply

  6. Posted by boscoe on April 14, 2019 at 2:14 pm

    Table 3, Private Sector 1998-2017: How can wages have increased 15%, benefits 39% and total compensation 38%? What kind of wage/benefit ratio would you have to have to come up with that skewed total?

    Reply

    • Posted by Tough Love on April 14, 2019 at 7:06 pm

      Does look odd relative to the 3 Public Sector categories.

      Two possibilities come to mind:

      (1) Perhaps Total Comp includes items beyond “wages” and “benefits” such as exercised stock options (which would only impact the Private Sector category)

      (2) The Table is “per employee”. If there was a material increase (from 1998 to 2017) in the proportion of all Private Sector workers that are very highly paid, the results shown could happen

      Reply

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