Retirement Benefits in the Public and Private Sectors: Three Myths

By Zorn, Paul | Government Finance Review, February 1995 | Go to article overview

Retirement Benefits in the Public and Private Sectors: Three Myths


Zorn, Paul, Government Finance Review


The growing interest in public- and private-sector retirement benefits may well result in public policies that have substantial, long-term consequences. For these policies to produce sustainable results, it is important that policy makers view retirement benefits in the context of a comprehensive package (including Social Security and defined contribution plans) and that they understand how the costs of the benefits are borne by employers and employees.

Certain myths regarding the differences between public- and private-sector pension benefits have been promulgated by recent articles in the popular press. These myths have tended to cloud the issues and polarize debate. In an effort to provide better information, the Public Pension Coordinating Council commissioned a study of retirement benefits provided by state and local governments and medium and large private firms. The study provides a synopsis of recent research conducted by the U.S. Bureau of Labor Statistics, the Wyatt Company and other pension professionals.(1) This article summarizes the major findings of the study and refutes three myths presented below.

Myth #1: Public-sector workers are over-paid relative to the private sector.

At first glance, total compensation costs between state and local governments and private industry appear vastly different. In a comparative study of total compensation costs, two U.S. Bureau of Labor Statistics (BLS) economists reported that in March of 1992, employee compensation costs (wages plus employer-provided benefits) averaged $23.49 per hour worked in state and local governments and $16.14 in private industry - a difference of almost 50 percent.(2)

In presenting this information, however, the authors warn that comparisons based upon these aggregate data are misleading and that the differences in compensation costs between the public and private sectors are largely the result of the variation in work activities and occupational structures of the two sectors. To quote the authors:

"Certain activities that are required in government, such as public education and safety, call for a large proportion of white-collar professionals and highly skilled service occupations. In contrast, certain industries such as manufacturing, wholesale trade, and retail trade are unique to the private sector and require occupations with comparatively lower compensation costs, such as sales. When certain industries common to both sectors are examined, such as health services, total compensation costs are similar."(3)

The authors support their argument with comparisons of total compensation costs for similar activities in the public and private sectors. For example, executive, administrative and managerial occupations accounted for about one in six white-collar employees in each sector, and their average hourly compensation costs were virtually identical ($29.86 per hour worked for state and local workers verses $29.42 for workers in private firms). Compensation costs also were similar for administrative support, construction, transportation and public utilities, and health services employees when compared across both sectors.

Other BLS data show that total compensation costs have grown at about the same rate in both the public and private sectors. For the five-year period between June 1989 and June 1994, total compensation grew 21.4 percent for state and local government employees, compared with 22.0 percent for workers in the private sector.(4) While there were slight differences within particular occupational groups, these differences were not substantial.

Myth # 2: Public-sector benefits are significantly more generous than private-sector benefits.

To support the claim that the retirement benefits paid public-sector workers are significantly more generous than those paid private-sector workers, a number of statistics have been cited in the popular press: 1) while almost 100 percent of public employees receive retirement benefits from defined benefit plans, only about 40 percent of private-sector employees do; 2) the benefits paid state and local government workers through their defined benefit plans are higher than for private-sector workers; and 3) cost-of-living adjustments for retirement benefits are more prevalent in the public sector than in the private sector. …

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