Comparing Public-versus-Private Sector Pay and Benefits: Examining Lifetime Compensation

By Reilly, Thom | Public Personnel Management, December 2013 | Go to article overview
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Comparing Public-versus-Private Sector Pay and Benefits: Examining Lifetime Compensation


Reilly, Thom, Public Personnel Management


Introduction

As states and local governments still struggle to recover and balance their budgets more than five years after the great recession began, much attention has focused nationally on how public workers are compensated, particularly with regard to personnel benefits and the ability of state and local governments to fund them. The soundness of many state and local pension and retiree health care plans is of particular concern. State and local governments are facing considerable pension and retiree health care obligations that have significantly contributed to their financial problems. Nationwide unfunded liabilities for pension and retiree health care range anywhere from $1.4 to over $4 trillion, depending upon what assumptions one uses (see, for example, Eucalitto, 2012; Novy-Marx & Rauh, 2011; The PEW Center on the States, 2011). The Governmental Accounting Standards Board (GASB), which sets the accounting standards for the public sector, has adopted new rules that could increase the gaps further. These rules adopted in June 2012 by GASB will likely show that public pension funds are in a weaker financial position than previously thought. Most go into effect in June 2013, others in 2014. State and local governments will now have to post their net pension liabilities--the difference between the projected benefits payments and the assets set aside to cover those payments--up front on financial statements (Lambert & Byrnes, 2012).

As the scrutiny of public sector pay has increased, renewed attention has focused on the longstanding debate on whether private sector workers earn more than their public sector counterparts. Conclusions from past comparison studies of pay and total compensation vary due to different approaches, methods, and data leading to disagreements over their applicability. In an effort to add to the literature on comparative compensation analysis and assess the impact of different compensation tools beyond simple wage differences, a comparative analysis involving a public-versus-private sector compensation model was constructed to gauge the cost of lifetime compensation. This analysis considers three types of workers within two different occupations classifications: a private sector employee with a traditional 401 (k) retirement package offering; a public sector employee who has a defined benefit (DB) plan with social security income and a public sector worker with no social security income. The two sample occupations reviewed as part of this analysis focus on administrative assistants (blue-collar workers) and engineers (white-collar employees) to provide alternatives for evaluation purposes. Examining both active employment and postretirement years will provide deeper insight into an ongoing debate that has intensified in recent years.

Theory

Competitive compensation is a key factor in ensuring that the public sector can recruit and retain a high-quality workforce. A key component for this is the ability of the public sector to compensate their employees in a manner comparable with their private sector counterparts (Llorens, 2008). The public sector has traditionally relied on job tenure, cost-of-living increases, and average general increases for its compensation practices. In addition, postretirement benefits typically include a defined-benefit pension plan and subsidized retiree health care. Eighty-four percent (84%) of state and local governmental employees have access to a DB plan versus 21% of private sector employees (Bureau of Labor Statistics [BLS], 2007, 2008). Eighteen percent of private sector employers offered health care coverage to early retirees compared with 71% of public sector employers (BLS, 2012a; Fronstin & Adams, 2012). By contrast, the private sector has relied more heavily on merit pay, pay-for performance, bonuses, profit sharing, and other forms of competitive pay (Coggburn & Kearney, 2010). Instead of pensions, most private employees have defined contribution (DC) plans and have little access to retiree health care.

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