Don't Buy the Myth That Government Workers Are Overpaid

With the economy stalled, wages stagnate, and government debt setting new records every month, it must make people furious to hear that the government coddles its workers with higher pay and richer benefit promises at the federal, state and local level. Federal employees' average compensation has grown to more than double what private sector workers earn, USA Today reported this week.

But was the story accurate? Does the private sector get a raw deal, or is the gap between public and private employees a myth? To find out I spoke with two experts on public and private compensation, one from the right and one from the left.

Here is an edited transcript of my interview with Christian Weller, a senior fellow at the liberal Center for American Progress. My interview with Andrew Biggs, a scholar with the conservative American Enterprise Institute, is here.

Is the public sector pampered?

The people who make that argument often simply compare average wages. That's wrong because the public sector has substantially more degrees than the private sector. One study by the National Institute of Retirement Security by Milwaukee that accounted for education found that the public sector gets paid between 7 and 12 percent less when you control for age and characteristics. That gap remains if you include compensation like pensions and health care.

Aren't the defined benefit plans for government employees promising the public sector much more retirement money than the private sector expects with defined contribution 401(k) plans?

The main issue here is that the public sector workforce has defined benefit plans. But if you compare apples to apples, you will find that similar workers in the private sector also tend to be covered with generous defined contribution or defined benefit plans. The majority of SP 500 companies, for example, offer defined benefit plans. And that's in addition to Social Security.

State pension plans are in a lot of trouble right now, as governments have promised more retirement money than they can pay. How grave is this crisis?

It's a broad landscape. There are thousands of state and and local plans.  Many of these plans, like in Massachusetts, are very well funded. They've weathered the crisis and generate good returns, and they've made adjustments to their benefit structure. There are other states and other plans that are a mess, like Illinois. But there is no one size fits all even problem.

What's the menu of options for fixing broken pensions?

There are four things you can do when your state pension plan gets into trouble: increase contributions from employers, increase contributions from employees, cut benefits, or aim for higher investment returns.

Is there discussion about a massive shift away to defined contribution and away from defined benefit?

It's more costly to go to defined contribution. The main issue is that defined benefit pension plans are professionally managed. That reduces the number of risks for the individual, takes away longevity risk, the chance that you'll run out of money in retirement, and it does that in a managed matter. It smooths over valley in peaks in investment performance over generations. I'm not saying we shouldn't have defined contribution plans. I have a defined contribution plan. But they should be an additional retirement vehicle, allowing you to individualize your savings.

Relying on defined contribution means you have to be born lucky. You can contribute the same as your parents and children and still come out with very different returns depending on whether you live in a prolonged bull or bear markets. Retirees in early 80s or now will come out bad. Retirees in the late 90s come out good. It's intergenerational lottery.