Retirement benefits in the public and private sectors: three myths.

• Author: Zorn, Paul
• Position: Includes related article

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...