Nonstopdrivel
15 years ago

FEBRUARY 25, 2010
Its Time to Tackle Government Pay 

BY MARTIN HUTCHINSON, Contributing Editor, Money Morning

It's fairly well known that the U.S. public sector is paid more than the private sector. What's less well known is that the gap between federal-employee pay and benefits and private-sector pay and benefits is increasing - by about 18% over the last decade.

Given the current level of U.S. unemployment and the size of the budget deficit, it would appear that some economies could be made. In short, it's time to tackle government pay.

After all, if Greece can economize, so can the United States...

The public-sector pay cuts Greece proposed to try and avoid bankruptcy are exceptionally wimpy: We're talking about salary reductions of only 1% and an extension of the retirement age from 61 to 63. The Greek government will need to do more than that if it wants to extract money out of Germany, where the retirement age was recently raised to 67 and taxpayers take a dim view of public-sector shenanigans.

Cutting public-sector pay used to be a tried-and-tested way of getting out of budgetary difficulties caused by recession - and it often worked exceptionally well.

In 1931, for instance, British Chancellor of the Exchequer Neville Chamberlain imposed a 10% pay cut on the British public services. His argument was twofold. First, prices had declined, so public-sector salaries should be brought down in line. And second, public-sector employees had job security - a benefit that private-sector workers don't enjoy, and an employment perk that's worth even more during a recession, when private-sector employees are getting sacked en masse.

The rather sophisticated understanding of option theory demonstrated by Chamberlain in that case contrasts markedly to the bumbling of his present-day successors!

Chamberlain's pay cuts caused a mutiny in the Royal Navy, but they worked. Unlike the United States, which sank further into the Great Depression, Britain had the best five economic growth years in its history from 1932-37, with that country's international-trade position recovering as rapidly as the living standards of its people. The elimination of about 10% of the government's costs - which otherwise would've served as additional dead weight on an already foundering economy - actually caused a negative "crowding out" effect, making capital available for investments in innovation and small businesses.

It wasn't what John Maynard Keynes would have recommended, but then Chamberlain thought Keynes was a charlatan.

The case for a Neville Chamberlain approach to U.S. public-sector pay and benefits is a strong one. In 1998, average wages and benefits for federal employees was 70% higher than in the private sector. Some of that may have been justified: Federal civil servants have, on average, better qualifications than private-sector workers, although there are fewer of them with the very highest qualifications.

By 2008, however, the total cost per civilian employee in the U.S. federal government had risen to $119,932, compared to $59,909 in the private sector. There can be no justification for paying federal employees twice the average private sector wage; the private sector, after all, has to pay the costs of employing all these overstuffed bureaucrats.

Even in state and local government, there is now a premium for wage costs over the private sector, though state-and-local government employees are, on average, less well- qualified than their private-sector counterparts.

There are some outrageous examples of feather bedding. Consider, for instance, the near-bankrupt state of California, which allows a worker to retire at 50 with an annual pension payout equal to 3% of salary for each year of service. In other words, a person who joined that state's workers ranks at 20 can retire at 50 on 90% of salary - indexed to inflation with full healthcare benefits, of course

And last year - in the depths of a horrid recession, and with states forced to make draconian cutbacks to balance their budgets - the remuneration of state-and-local-government employees increased 2.4%, double the 1.2% increase seen in the private sector.

Cutting federal employees back just to their 1998 levels in terms of what the rest of us earn would involve a 15% pay cut. That's a bit more than the 10% cut imposed by Chamberlain, but is certainly justified.

Based on 2008 figures, which must surely be conservative for 2010, given the recent growth in government, such a reduction would save $116 billion a year. That's the equivalent of about $1.3 trillion between now and 2020, a 10-year stretch that represents the normal budgetary horizon.

That doesn't eliminate the U.S. deficit problem, but it certainly makes a decent hole in it.

That's clear a government cutback I can go for...


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Porforis
15 years ago
I absolutely agree. However, try being an elected official and tell the teachers union that they won't get a raise this year. You'll get rode out of town. In the meantime, here in the private sector we've had a pay freeze for the last 2 years and I'm making $2/hour less than I otherwise would have, and as a result am digging into my emergency savings just to pay the bills. I have no pension, and have no way of saving for retirement at this critical stage of my life... I cannot afford to cut back my hours at work to go back to school so that I may get a better job, so I'm forced to take a class or two at a time and take out student loans.

That is all.
Nonstopdrivel
15 years ago
Are there any bills you can get rid of?
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DakotaT
15 years ago
In my state the government workers went without pay increases for many sessions and dropped into the bottom third of state compensation packages throughout the country. Last year the state finally had surpluses, so they gave a large catch up raise. So when the private sector was raking it in, the goverment employees got nothing, and now when the economy has slowed the government employees are finally getting theirs. People need to understand that economics is cycular and that articles like Nonstop posted show a small portion of the big picture. North Dakota's government workforce has a large percentage of college educated workers who work for less than market value, but they have a fully funded health plan (premiums that is) and a defined contribution pension. So they work for less pay but have extraordianary benefits.
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Porforis
15 years ago

Are there any bills you can get rid of?

"Nonstopdrivel" wrote:



The only thing I really ever buy that I don't need is fast food about twice a month, and about one energy shot a week averaged out (about $2.00). I've never been a person that wants stuff... In terms of what I bought myself last year, I think I bought a pair of CDs (online, cheaper that way) and a TV (which all but $200 of it was a gift). I typically like to be generous with my gift-giving but the financial situation just wasn't there last year. I have internet at home, however I work from home over the internet so getting rid of that is not an option. I don't have cable TV, I share my internet (and the bill) with my former landlady who lives in the next apartment building over.

Do I waste money? Sure. I could eat out less than I already do, drive less... But I really like to think that I spend a lot less money on non-essentials than most people.

However, this is kind of off-subject. The entire reason why I started bitching about what I make is because I make much less than the industry standard for what I do, and the only thing my company has been able to do to compensate me for being extremely reliable and productive is let me work from home... It's not that I don't appreciate it, the point is that the private sector is suffering and they don't have the liberty of taking money from other people in order to give themselves raises, or printing off more money to pay themselves. They're stuck in the real world.
Porforis
15 years ago

In my state the government workers went without pay increases for many sessions and dropped into the bottom third of state compensation packages throughout the country. Last year the state finally had surpluses, so they gave a large catch up raise. So when the private sector was raking it in, the goverment employees got nothing, and now when the economy has slowed the government employees are finally getting theirs. People need to understand that economics is cycular and that articles like Nonstop posted show a small portion of the big picture. North Dakota's government workforce has a large percentage of college educated workers who work for less than market value, but they have a fully funded health plan (premiums that is) and a defined contribution pension. So they work for less pay but have extraordianary benefits.

"DakotaT" wrote:



Which is quite standard throughout the public sector. If I got paid the $22,000/year pretax that I'm making now AND got a pension out of it, I'd be fine with living tight until retirement if it meant that I HAD a retirement. However, out in the real world we have to pay for our own premiums and retirements. Maybe it's just regional, but I've lived in Wisconsin, Minnesota, and Indiana and all I've heard over the last 10 years is bitching from the teachers unions and city/county employees when someone suggests that a pay freeze be enacted.
Nonstopdrivel
15 years ago
I wasn't sharpshooting, Porforis. I was sincerely curious.

DakotaT also has a point, of course. Military pay, for example, has lagged behind civilian pay for the better part of three decades and only this year or next year will finally attain parity with the civilian sector after over a decade of higher-than-civilian-sector raises designed to close this gap.
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Cheesey
15 years ago
The only thing that the military does that the private sector doesn't is, you can work 30 years and retire with a pension. Now adays, the chance of the company you work for even surviving 30 years is extremely rare. It most likely will be sold off, or shut down, thus throwing away how ever long you worked there.
The place my wife has worked at for 15 years has had 3 owners.
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Nonstopdrivel
15 years ago
You can retire after 20 years with a pension equal to 50% of your average base pay for the last three years of your career. Every year thereafter, your pension increases by 2.5% of base pay until it maxes out at 75% after 30 years of active service.
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