The Magazine

Yes, They’re Overpaid

The truth about federal workers’ compensation

Feb 14, 2011, Vol. 16, No. 21 • By ANDREW G. BIGGS and JASON RICHWINE
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As it happens, history has provided this test: While federal employees hired before 1984 have only defined benefit pensions, those hired after 1984 have a smaller defined benefit pension coupled with a defined contribution plan. If the pension job lock theory were correct, quit rates today should be much higher than in 1984. In fact, precisely the opposite is the case: Quit rates among federal workers hired after 1984 are actually around 30 percent lower than for similar workers in 1984. This casts serious doubt on the claim that the structure of federal pensions, not generous overall compensation, explains the small number of federal employees who leave their jobs.

Just as few federal employees quit their jobs, many private sector workers seek federal employment, seeing it as both well compensated and secure in a time when many private sector jobs are not. While data on the number of applicants per federal or private sector job are scant, research in the late 1980s indicated that federal jobs on average received 25 percent to 38 percent more applicants than private sector positions. A 1985 study by economist Steven Venti concluded that from 18 percent to 29 percent of workers would accept federal employment if offered. Roughly three times as many men would be willing to accept federal employment as are actually offered federal jobs; for women, the ratio is six times, implying that federal jobs provide a significantly more attractive overall package than private sector options. 

These results, Venti concluded, suggest “the government could continue to attract a workforce of current size with substantially lower wages.” Moreover, even significantly lower wages would only slightly reduce the quality of federal job applicants. We will have the opportunity to test this view as the administration’s pay freeze takes effect. Will federal quit rates rise as pay is frozen? We doubt it. 

The left often portrays any criticism of public sector employees as an attack on government, unions, or working Americans. In addition, they say, even if claims of overpayment are true, the numbers are small relative to looming deficits from entitlement programs such as Social Security, Medicare, and Medicaid. 

But this misses an important point: If ordinary Americans are to accept significant sacrifices in programs that are dear to them, they need to know that there isn’t a protected class receiving better treatment. 

A number of studies of fiscal consolidations in OECD countries over the past several decades have shown that reductions in the government wage bill—that is, the size and pay of the public sector work force—are an important part of larger efforts to balance the budget. A recent study published by the American Enterprise Institute showed that countries that succeeded in reducing their fiscal gaps placed a lot of weight on reducing public sector pay. 

One reason is that reducing the public workforce shifts resources to the private sector, where they are almost certainly better utilized and so benefit the economy. A second, and probably more important, reason is basic credibility: When a government is willing to take on entrenched interests, it demonstrates to both citizens and financial markets that it is serious about reform. Individuals are more willing to invest when they feel confident their taxes will not rise in the future, and lenders are more willing to purchase government debt when they know it can be paid back. 

A 1996 International Monetary Fund study concluded: “Fiscal consolidation that concentrates on the expenditure side, and especially on transfers and government wages, is more likely to succeed in reducing the public debt ratio than tax-based consolidation.” Given the size of the fiscal gap the federal government must close, it seems foolish to leave the government wage bill out of the equation.

The devil is in the details. Cutting or freezing federal pay across the board would be an improvement over the status quo, but more fundamental reform is needed. Without a change in the basic system of setting pay, salaries could easily creep upward again with little fanfare. In addition, we do not want to cut the wages and benefits of certain federal workers—research scientists, engineers, and senior lawyers, for example—who are not currently overpaid.

We could offer some specific proposals—cutting down on excessive vacation pay and phasing out the defined benefit pension come to mind—but more important for now are the principles a new system should follow. Rather than a rigid pay schedule, the federal government should attempt to at least approximate the effects of supply and demand that private labor markets exhibit. While academic studies can attempt to account for differing salaries, benefits, job security, and work conditions, the ultimate test is the market itself, where job seekers compare the overall package offered in federal employment with the offer from private employers. Probably the best way to capture market effects is to track the number of applications submitted for a given federal job. When large numbers apply for a position, that is a signal that the compensation package may be overly attractive; likewise, when a federal position attracts few applicants—and many high level positions do—then better pay may be warranted. But to act as if a small number of salary-setting bureaucrats can accurately set pay and compensation for thousands of jobs of different types is folly, which hurts taxpayers and reduces the effectiveness of the federal workforce. 

The question of whether federal workers are overpaid is often portrayed in the media as unanswerable, with each side of the debate citing its own numbers. In fact, the academic evidence is much more one-sided: Generally speaking, federal workers do receive higher salaries than similar private employees; individuals changing jobs receive bigger pay increases when their new job is with the federal government; federal employees quit less than private workers; and private workers line up to get federal jobs.

Fundamental reform of federal compensation—not merely temporary pay freezes or furloughs—could offer significant benefits to taxpayers. At the same time, we must acknowledge that there is no perfect solution. No amount of “good government” reforms can ensure that federal workers are paid exactly the same way as their private sector counterparts, because the federal government can never be subject to market forces the way the private sector is. 

Taxpayers should recognize that bureaucratic inefficiencies like excessive pay are part and parcel of large government. Reform of the pay system is important and necessary, but ultimately the best means of reducing excessive federal paychecks is to reduce the size of the federal government.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute. Jason Richwine is a senior policy analyst at the Heritage Foundation.

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