When Oldsmobiles Turn Into Cadillacs

Kevin Drum checks in with the latest from the class wars:

In the middle of a rant about healthcare reform and the compromise over the Cadillac tax, one of Andrew Sullivan's readers says this:

The idea that public employees make less than those in the private sector is a myth that needs to die. Most already have cadillac plans and in most places their salaries are ahead of private workers whose taxes go pay for their income. On top of that they get much better benefits and pensions, so to let them out of a tax that private industry workers will have to pay who work at the same income level is a slap in the face. Our system cannot work if the government employees earn more than the private industry workers earn who are supporting them.

Kevin wonders whether this is really true:

In the upper reaches of management, it obviously isn't. Mid-level and executive level managers often make half as much as comparable private sector managers. (Or less.) And although rich pension deals make headlines, it's not clear how widespread they really are.

More generally, though: do ordinary workers (clerks, school teachers, construction workers, etc.) make as much as their private sector counterparts? Or more?

Thinking about this reminded me of a story my father tells about his days as a negotiator for the local teacher's union in the mid-80's. At a time when the economy was going along pretty well, the teachers contract came up, and they asked for a large raise, pointing out that lots of other people in the area were getting big raises. They were told "You knew that education didn't pay well when you became teachers. If you wanted to make lots of money, you should've done something more lucrative." They ended up negotiating a three-year contract with specified raises that were decent, but not as good as they had hoped.

A year later, the economy went in the tank, and the very same people who had been pooh-poohing the idea that teachers should get big raises during good economic times turned up at board meetings ranting and raving about how it was totally outrageous for teachers to be getting pay raises at a time when other people were suffering.

This is a roundabout way of coming around to my thought regarding the "Cadillac plans" public employees have, which is that the "Cadillac plan" they currently have probably didn't seem like such a sweet deal back when the contracts were first hashed out.

To the limited extent that it's true that public employees have better benefit packages than corporate sector workers, it's not because the public employees have been getting really sweet deals from their employers. Rather, it's because white-collar corporate employees, who do not have the benefit of unions and the like, have been getting the shaft for years now. The benefit deals that look so sweet now were pretty ordinary not all that long ago, but haven't changed as rapidly as private sector plans did in response to the explosion in health care costs.

If that's the case, my response to people complaining about sweet benefits packages in the public sector (or in union industries like US automaking) is the same as my father's reaction to people complaining about the outrageous raises the teachers were getting: Tough shit. If you wanted income security, you should've gone into a public sector job.

Those benefit packages were offered in lieu of higher salaries back in the day, which seemed like a pretty good deal to the people running the show. Now that the costs have turned out to be inconveniently high, they want to get out of the promises they made to their employees, but that's not how things work.

If you trade security and benefits for the chance at higher profits, that's your choice. But you don't get to laugh at those who made a different choice in good times, and then drag them down when things blow up in your face. You bought your chips, you spun the wheel, you have to take whatever you get.

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By Eric Lund (not verified) on 26 Jan 2010 #permalink

I can't speak for all situations, of course, but I've worked in the same Federal facility for a decade and I've seen probably a dozen contractors convert over to Civil Service in that time. The pay cut to go CS is anywhere from 8-14% for pay grades below a 15. I know, I've considered it several times for the job security and retirement package. To balance that out as CS you get more vacation days and a cheaper (and probably better) health care plan, but the base salary is noticeably less than the private sector salary to do the exact same thing.

I think you're wrong here, Chad. I don't think public sector employees are getting average deals while everyone else is getting the shaft. Public employee unions are using their political clout to extort deals out of politicians that are beginning to bankrupt cities and states all over the country. Look at California. Some facts (from an excellent WSJ article):

1) over the past decade pension costs for public employees increased 2,000% in California. State revenues increased only 24% over the same period. The state had to divert $3 billion from other projects to the pension programs.

2) There are now more than 15,000 government retirees statewide who receive pensions that exceed $100,000 a year, according to the California Foundation for Fiscal Responsibility. This isn't sustainable.

Here in Omaha we're dealing with similar issues. Firefighters and police unions have helped get the Major elected and have gotten sweet deals for it. Police have been "spiking" their pensions - work tons of overtime in your last year and your pension can actually be more than you ever made in your career yearly. As a result, the city is running a huge budget deficit.

What it comes down to is that it's easy for politicians to give unions sweet deals - it's not their money and in return they get support for reelection. It's a broken system.

I think you're wrong here, Chad. I don't think public sector employees are getting average deals while everyone else is getting the shaft. Public employee unions are using their political clout to extort deals out of politicians that are beginning to bankrupt cities and states all over the country.

The claim is not that they're getting less in terms of pensions than other people now-- that's clearly false.

The claim is that the pension and benefit packages public employees get now would've been fairly ordinary 20-ish years ago. They seem outlandishly large now because private sector pension/benefit packages have gotten worse (because of the lack of collective bargaining) in the intervening years.

They seem outlandishly large now because private sector pension/benefit packages have gotten worse (because of the lack of collective bargaining) in the intervening years.

You'd also want to take a look at the type of pension plan in place. I don't know the situation in the US, but in Canada defined-benefit plans (you know what you're getting down the road, but your individual contribution varies) are increasingly rare, becoming replaced by defined-contribution plans (you put in a set amount, and you take what you get). I suspect more public-sector plans still tend to be defined-benefit.

(My knowledge of this comes from a 6-month temp job for a pension fund advisor and my financial-geek family members, so detail/correction from people who know more about this is most welcome. Oh, and data point: I work for a hospital and have a defined-benefit plan.)

By Electric Landlady (not verified) on 26 Jan 2010 #permalink

@Electric Landlady: It's exactly the same in the US. If you work in the public sector, you might still have a defined-benefit pension plan. Everybody else who has a pension (many have no pension at all) has some kind of defined-contribution plan: 401k for for-profit employers and 403b for non-profit employers (those numbers refer to the relevant section of the tax code). Even among public sector employees, you're not guaranteed to have a defined-benefit pension plan. I work at a state university, and I have a 403b. Chad, if he contributes to his retirement plan, probably has a 403b as well.

It is also incorrect to blame the fiscal troubles of California or Omaha entirely on the unions. There are two sides to every negotiation--somebody from the government agreed to that benefits package (you can argue that the agreement was not entirely voluntary, but that's a separate discussion). Also in the case of pensions there are pension managers involved, many of whom seem to have made overly optimistic estimates regarding investment returns. From what I've heard from people I know in the UC system and what I've read in cyberspace, CalPERS seems to have been particularly incompetent in managing their pension fund, but they are hardly the only offenders.

By Eric Lund (not verified) on 26 Jan 2010 #permalink

First of all, you can't lump all public sector employees together. Lots of state and local workers are getting a much better deal than I am as a fed. You can't even lump all federal employees together. People who retired under the old Civil Service Retirement System (CSRS) get a much better deal that those of us who will retire under the Federal Employees Retirement System (FERS). Pretty much everyone who joined government after 1987 is in FERS.

As someone who will retire under FERS, I get an annuity that will be worth 1.1 percent of my high three year average salary times the number of years of service, social security (if it's still around) and what's in the governments version of the 401K, the TSP. I'm not exactly sure what is so lavish about that. The small pension aspect gives me more security than many in the private sector, but most people I know in the private sector get a higher match for their 401K.

I'm also dying to know what is so lavish about the standard Blue Cross Blue Shield Plan that I pay about $80 for every two weeks. That's just for coverage for me. That's not family coverage. That went up 18% this year.

The federal government has also graciously organized the ability to purchase, dental, vision, and long term care benefits, but we get no subsidy on those.

While I can accumlate gobs of sick leave, I get no paid short term disaibility and no paid parental leave. Most of my friends have been able to cobble together something like 6 to 8 weeks of paid leave between sick leave and vacation when they have had babies. Almost all of them ending up taking unpaid leave.

Even federal employees who are in unions do not have the ability to negoiate pay and benefits. Those are set by law. However, Postal Employees who do negioate benefits as part of their collective bargining agreement pay significantly less in health care costs. The same BC/BS plan that I pay $80 every two weeks for, they pay $57 every two weeks for.

I can't complain about my benefits, but I wouldn't characterize them as lavish. Also, if you want to get rich, you don't go into government service. Most people going in know that. It's true that I could be making almost twice as much money if I did private sector consulting, but I'd have to travel all the time to do it. I'd also work 70 to 80 hours weeks. Not the 50 hour weeks I do now. I'm not sure where they the rumor that civil servants only work 40 hours a week came from, but almost no one I know does.

By katydid13 (not verified) on 26 Jan 2010 #permalink

The other reason municipal employees get good benefits is because it's a way to delay compensation--that is, move the salary costs past one's term of office. If the costs of future benefits were added into current operating costs, everyone (including citizens) would be forced to have some very difficult discussions.

G @ 3:

I believe California's problem is that their retirement program was not sound on an actuarial basis. Many companies used to pay retirement out of future income rather than fund it as the credits were earned by the employees. Bankrupt retirement "plans" and bankrupt companies led to a federal law that changed that, but many states still operate that way.

And, by the way G, its not like a firefighter or a cop ever has to worry about making it to retirement. They never get killed on the job. Easy work. Everyone should take one of those jobs.

But lets get concrete and compare apples to apples. How do your private college benefits compare to those at a public college in your area?

By CCPhysicist (not verified) on 26 Jan 2010 #permalink