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Cadillac Pay in the Land of Lincoln

Friday, November 4, 2011

Illinois public employees likely receive a significant pay premium over similar private sector workers.

Apparently, some quotes I provided for a news story on public sector pay in Illinois, where pay and benefits for government workers is a live political issue, have caused some concern there. I haven’t analyzed Illinois specifically–and as my study with Jason Richwine on Ohio pay shows, these things can get complicated–but my guesstimate to the reporter was that it’s very likely that Illinois public employees receive a pay premium over similar private sector workers.

Based on 2005-2010 data from the Census Bureau’s Current Population Survey, Illinois state and local workers receive salaries around 5.8 percent below those of private sector workers with similar education and experience. A small salary penalty isn’t uncommon for state/local employees, although I’m told that Illinois workers have recently received pay increases that may not be fully represented in the CPS data. So it is highly possible that average salaries are around even.

But my main point was that public sector benefits are a lot more generous than those in the private sector. Let’s say you had an Illinois state employee who retired at age 65 with 30 years of service and a final salary of $60,000. His annual pension benefit would be around $29,160. For this, he contributed about 4 percent of his working salary, although I understand that in some cases the contribution is “picked up” by the employer. From 1992 to 2003, it seems that most Illinois state employees paid no pension contribution, and many still do not.

My main point was that public sector benefits are a lot more generous than in the private sector.

Now let’s see what that same worker might get from a 401(k), which most private sector workers have. Let’s assume he contributed the same 4 percent of pay and his employer contributed 3 percent, which is fairly typical in the private sector. Let’s also assume he invested in government bonds, since he wants a guaranteed benefit to match the public sector defined-benefit plan. This would provide him with a retirement annuity of around $4,450. In addition, he would receive a Social Security benefit of around $22,700, for a total of $27,150. Illinois public employees generally don’t participate in Social Security.

About even, right? Except that to get the Social Security benefit a private sector worker has to pay an additional 6.2 percent of his wages. So the private worker contributes 10.2 percent of pay for a pension of $27,150 while the Illinois government worker contributes 4 percent (and sometimes less) for $29,160. This is what I meant when I told the reporter, “If you take someone who earns the same wage and run the earnings through public pensions and the private sector, the public employee benefits are much, much higher.”

In the story, a spokesman for the American Federation of State, County, and Municipal Employees countered that Illinois pensions aren’t that generous. He pointed to an average figure of $30,000 for Illinois retirees as a whole, while the Illinois State Teachers Retirement System has pointed to an average teacher pension of around $43,000 per year. I’ll focus on this latter number, since I have figures at hand.

The private worker contributes 10.2 percent of pay for a pension of $27,150 while the Illinois government worker contributes 4 percent (and sometimes less) for $29,160.

First, it is not an average for teachers retiring today; rather, it includes teachers who retired years or decades ago who, because salaries were lower in the past, receive lower pensions than a teacher retiring today. The 2010 actuarial report for the Teachers’ Retirement System of Illinois shows, for instance, that current retirees between the ages of 55 and 59 receive average annual benefits of $55,893. Second, even that figure is deceptive because it includes benefits paid to individuals who worked only part of their careers in public schools. These retirees would receive lower average benefits, but they may also have retirement income drawn from another job. The 2010 Comprehensive Annual Financial Report in Illinois shows that the average benefit paid to a 60-year-old retired teacher with 35 to 39 years of service—a full working career—was $67,452. This is enough to provide a retirement income 50 percent higher than most Americans earn while they’re working.

I haven’t run all the numbers and I haven’t looked at the other benefits earned by public and private sector workers, which you need in order to estimate the whole picture on Illinois government pay. But simply to produce the same pension as the stylized Illinois public employee illustrated above, a private sector worker would have to increase his 401(k) contribution from 4 percent of salary to more than 40 percent. So it appears very likely to me that generous public sector pension benefits are more than enough to make up for a modest public sector salary penalty in Illinois. Short story: my guess is that Illinois public employees are overpaid relative to similar private sector workers.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute.

FURTHER READING: Biggs also writes “How Much Does the Federal Government Really Spend?” “From Ponzi to Perry: The Truth about Social Security,” “The Obama Administration's Lone Star Mistake,” “Means and Extremes: How Not to Balance the Budget,” “Public Pensions Roll the Dice,” “Are Public School Teachers Underpaid?” and “Public vs. Private Sector Compensation in Ohio.”

Image by Darren Wamboldt | Bergman Group

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