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

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

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The large unfunded liabilities surrounding public pensions in the United States will ensure the issue of comparable pay between the public and private sectors remains in the forefront of public policy debates. Disagreements on pay and total compensation comparison studies vary due to different approaches, methods and data. In an effort to add to the literature on comparative compensation, 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 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. For the two occupation scenarios analyzed, total compensation of public employees is higher than that of an average private sector employee. When the total compensation is based on years worked, the divide between the public and private sectors increases significantly. In light of this analysis, several important public policy issues are advanced.
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Public Personnel Management
42(4) 521 –544
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DOI: 10.1177/0091026013505504
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Article
Comparing Public-Versus-
Private Sector Pay and
Benefits: Examining Lifetime
Compensation
Thom Reilly1
Abstract
The large unfunded liabilities surrounding public pensions in the United States will
ensure the issue of comparable pay between the public and private sectors remains in
the forefront of public policy debates. Disagreements on pay and total compensation
comparison studies vary due to different approaches, methods and data. In an effort
to add to the literature on comparative compensation, 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 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. For the two occupation scenarios analyzed, total compensation
of public employees is higher than that of an average private sector employee. When
the total compensation is based on years worked, the divide between the public and
private sectors increases significantly. In light of this analysis, several important public
policy issues are advanced.
Keywords
public-versus-private sector compensation, public pay, lifetime compensation,
pensions
1San Diego State University, CA, USA
Corresponding Author:
Thom Reilly, San Diego State University, 5500 Campanile Drive, San Diego, CA 92182, USA.
Email: treilly@mail.sdsu.edu
505504PPM42410.1177/0091026013505504Public Personnel ManagementReilly
research-article2013
522 Public Personnel Management 42(4)
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 person-
nel 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 pen-
sion 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 disagree-
ments 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 compensa-
tion. 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
Reilly 523
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 pri-
vate 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.
Historically, there has been a trade-off for working in the public sector—the prom-
ise of job security and solid health and retirement plans in compensation for forgoing
higher wages in the private sector. Over the years, benefits have increasingly become
a significant and growing portion of the total compensation for public employees.
Public employees have benefits that are more expensive and valuable than their coun-
terparts in the private sector (Anzia & Moe, 2012; Brady, 2007: Fleet, 2007). More
generous benefits have assisted in offsetting the compensation limitations for many
public workers (Coggburn & Kearney, 2010). Elected officials have often favored
more enhanced benefits packages in lieu of salary increases because it has been politi-
cally easier for governments to increase benefits instead of wages. Increasing benefit
packages are less visible to the public, and the cost can be spread out over time
(Kearney and Carnevale, 2001; Reilly, Schoener, & Bolin, 2007). However, deferring
public sector compensation to the future generations of elected officials and taxpayers
ends up being more expensive as the costs are transferred with interest (Reilly, 2012).
Hunter and Rankin’s (1988) compensation model supports this premise. The
authors suggest that public employees are compensated for providing two sets of ser-
vices: public services and political services. Public services are those that the public
expects employees to provide, and political services include activities such as endors-
ing candidates, raising money for them, giving them campaign donations, and/or pro-
viding staffing for particular elections. The authors contend that this helps explain
why fringe benefits have grown substantially in the public sector and are larger as a
percentage of wages and salaries than in the private sector. Fringe benefits provide the
perfect avenue for political payment because they are usually invisible or unknown to
the public. The political power of public sector unions will have a greater impact on
fringe benefits than on wages if compensation in that form is less likely to be subjected
to public scrutiny. Kearney and Carnevale (2001) also contend that public sector
unions support increasing benefits over wages because the costs are less transparent to
the community and can be spread out over time. Other scholars have also found that
public sector unions have a larger impact on benefits than wages (Ichniowski, 1980;
Zax, 1988).
As the value of postretirement benefits has increased and assumed a more promi-
nent role in the total compensation for public employees, examining both active
employment and postretirement years is essential in comparing public-versus-private
compensation. This study’s model assessing the cost of lifetime earnings for the two
sectors provides a useful perspective in the ongoing debate.
524 Public Personnel Management 42(4)
Research
Although there has been a good deal of research on the level of pay differences between
public and private workers, there has been little consensus on what pay differentials
actually exist. Differences have emerged depending on the type of data used and meth-
odology employed including comparisons in occupational composition of the two sec-
tors and compensation differences that exist between federal, state, and local
governments (Borjas, 2002; Llorens, 2008; M. A. Miller, 1996). Public–private com-
parisons can also prove challenging because of confounding factors, such as other
workers’ characteristics and wage dispersions. In addition, certain methodological
shortcomings by researchers further complicate this debate including the values and
political ideology of the researcher and either neglecting to include benefits as a
dependent variable or difficulty in determining a dollar value of benefits in the analy-
sis (Kearney, 2009). Ultimately, much of the public–private debate centers on elusive
accounting and areas that are difficult to value, especially retirement benefits, retiree
health care and job security. Most public employees are guaranteed a pension via a DB
package and have access to retiree health care. These benefits have been disappearing
rapidly in the private sector. Determining the worth of these benefits is the subject of
much debate (Reilly, 2012).
Researchers have used various approaches and data to compare benefit packages
and compensation rates of private and public sectors. Three common approaches used
are the human capital approach, job-to-job approach, and a trend analysis approach.
The human capital approach compares pay for individuals with various personal attri-
butes such as education, and other job attributes such as occupation. A job-to-job
approach compares pay for similar jobs of various types based on job-related attributes
such as occupation, but it does not take into account the personal attributes of the
workers. A trend analysis approach shows broad trends in compensation over time
without controlling for attributes of the workers or jobs. However, even when com-
mon approaches have been used, results have varied significantly. For example, recent
studies using the human capital approach to study federal pay by Biggs and Richwine
(2011), the Congressional Budget Office (CBO, 2012), and Shrek (2010) reported that
average federal workers’ pay was higher than private sector workers’ pay by 14%, 2%,
and 22%, respectively. The differences in pay grades in all of these studies were
“unexplained.”
Most analysis, similar to the aforementioned studies, show that the average federal
pay is distinctly higher when compared with similar positions in the private industry
(Bureau of Economic Analysis, 2004; Linneman & Wachter, 1990; Moore & Raisin,
1991; Picard, 2003; The Project on Government Oversight, 2011; The President’s Pay
Agent, 2011; Wetterich, 2012). However, this has not always been the case at the state
and local level where differences in wage and salary payouts are less when compared
with the private sector. Researchers generally have found either a smaller premium for
state and local worker salaries or wage penalties when education, experience, and
other factors are taken into consideration (Bender, 2003; Borjas, 2002; Branden &
Hyland, 1993; M. A. Miller, 1996; Picard, 2003; Thompson & Schmitt, 2010). Using
Reilly 525
panel data from the U.S. BLS Current Population Survey, Llorens (2008) found that,
on average, state government employees enjoy a positive wage premium when com-
pared with their private sector counterparts, and Barro (2011) found that state and
local workers enjoyed a higher overall compensation (salary plus retirement and health
benefits) than their private sector counterparts. Munnel, Aubry, Hurwitz, and Quinby
(2011a) found total compensation comparable between the two sectors with similar
characteristics, education and experience.
Others have found that public sector workers earn less than the private sector, espe-
cially when they controlled for education. Data compiled by the New York Times (Luo
& Cooper, 2011) from an analysis of recent census data by demographers at Queens
College of the City University of New York looked at wages and salaries of public
sector workers and found that the clearest pattern to emerge was an educational divide:
Without college degrees, workers do better working for the public sector while public
sector workers with degrees do worse. They also found that this divide has widened in
recent decades. Since 1990, the median wage of state workers without college degrees
has surpassed private workers, while college-educated state workers’ median pay
lagged further behind their peers in the private sector.
Keefe (2012) used national data and within a range of states found that public
employees (state and local governments) receive total compensation that is equal to or
less than that of the private sector. Controlling for education and various human capi-
tal variables (such as age), he found that public employees earn 11.5% less in terms of
base pay than their private sector counterparts. When he added health and retirement
benefits, the difference between public and private sector compensation is reduced to
3.7%, with private employees receiving the higher compensation.
Likewise, Bender and Heywood (2010) compared worker earnings across and
between private, state, and local sectors over a 20-year period and found wages and
salaries of state and local employees to be lower than those for private sector workers
with comparable earning determinants (e.g., education). They found that state employ-
ees typically earned 11% less and that local workers earned 12% less. When benefits
such as pensions for state and local employees were factored in, on average, the total
compensation was 6.8% lower for state employees and 7.4% lower for local workers
when compared with comparable private sector employees. However, the study has
been criticized for skewing the findings by excluding the cost of public employee
retirement benefits such as retiree health care and for ignoring the cost of unfunded
pension costs; for controlling for unionization and then removing it as a factor even
though unionization has been found to be a driver of compensation costs; and for using
the compensation practices of the school district for comparisons in college education.
Almost one half of the public workers in the study were educators, and teachers are
paid less than other college graduates in the private sector (G. Miller, 2010). While
there is still a lack of consensus on what pay differentials exist and whether these dif-
ferences are justified between public sector and private sector workers, there seems to
be little dispute with regard to benefits. The disagreement among researchers centers
on how best to assign a value to them. Public sector workers have traditionally received
relatively generous benefit packages (Brady, 2007; Fleet, 2007). The average benefit
526 Public Personnel Management 42(4)
cost to employers as a percentage of wages and salaries is 34% for state and local
government employees and 29% in the private industry (BLS, 2009). Eighty-four per-
cent (84%) of state and local governmental employees have access to a DB plan versus
21% of private sector employees (BLS, 2007, 2008).
Using household data, Munnel, Aubry, Hurwitz, and Quinby (2011b) looked at the
wealth of couples at age 65 to determine whether state/local employees ended up with
more wealth at retirement than their private sector counterparts. They found that those
with state/local employment who spent more than half of their career as public employ-
ees had 11% to 18% more wealth at age 65 than similar private sector couples. Public
employees who spent less than half of their career as public employees ended up with
less wealth than private sector employees.
Biggs and Richwine (2011) have been vocal critics of many public-versus-private
pay studies citing their failure to properly account for the deferred benefits available to
public employees. The authors claim that most of these studies omit or understate
retiree health care and pensions when calculating the overall compensation figures. For
health care, they contend that the increases in individual policy costs versus purchasing
an individual health plan (25% more in general) are not considered in most calculations.
The authors argue they should since most private sector retirees are required to pur-
chase their own policy, especially if they retire early. With regard to pensions, they
argue that public sector workers will receive a guaranteed level of pension benefits after
retirement based upon the plan’s formula. DB plans are almost always indexed for
inflation, and longevity of the retiree is not an issue because the pension is guaranteed
for as long as the individual retiree lives. For the private sector retiree with a DC plan,
the amount of their retirement is subject to economic conditions and the investment
strategies of the individual account. It can be a challenge to gauge the amount of finan-
cial resources needed and the retiree runs the risk of outliving their pension assets. The
authors contend that this can increase the total compensation for the public sector
worker by as much as 4%. Finally, on the topic of job security, they suggest that a
model should be used to determine its cost advantage. Using the theory of “certainty
equivalent,” they estimate the additional compensation for job security to be 15%.
Assumptions
In an effort to assess the impact of different compensation tools beyond simple wage
differences, a comparative analysis of the public-versus-private sector compensation
model was constructed to gauge the cost of lifetime compensation. It is important to
note that the model only addresses compensation during active employment and post-
retirement years. Other compensation tools such as disability and insurance are
excluded from the model. It would be difficult to calculate the value of a health insur-
ance plan and its benefits from one sector or another, as employees often have the
option to opt-in to these programs. Understandably, a health insurance benefit has the
potential to indirectly put more dollars into an employee’s disposable income.
Nevertheless, a separate more complex benefit model would need to be constructed
and it would still be difficult to compare apples-to-apples on a macro-scale since many
Reilly 527
health care plans are unique to an individual. That said, the model does account for
health care subsidies often received by public sector employees in retirement.
Compensation in real dollars goes beyond the bi-weekly paycheck. The model was
designed to measure the total value of one’s employment throughout his or her entire
life, including retirement. Over a lifetime, compensation variables incorporated into
the model include cost of living adjustments (COLAs), step increases, social security
participation, individual retirement accounts with employer matches, public employee
retirement systems, retirement age, and a postretirement health care subsidy. The
model was constructed knowing that each job, jurisdiction and bargaining agreement
is different; therefore, becoming its own working model. However, on a national scale,
an average could be inserted into the different variables to understand how one pay-
ment tool impacts the employee’s compensation over a lifetime. Only the input values
would need to be modified to compare two employees in a single jurisdiction. The
following provides an overview of the methodology implemented and key compo-
nents of the modeling inputs and assumptions.
This analysis considers three types of workers within two different occupations
classifications: (a) a private sector employee with a traditional 401(k) retirement pack-
age offering; (b) a public sector employee who has a DB plan with social security
income (e.g., Florida model); and (c) a public sector worker with no social security
income (e.g., Nevada model). The two sample occupations reviewed as part of this
analysis focus on administrative assistants (BLS, 2012b: SOC code 436014) and engi-
neers (BLS, 2012b: SOC code 170000) to provide alternatives for evaluation pur-
poses. The Florida model was chosen because it is reflective of some of the recent
changes being made nationally to public DB plans (Snell, 2012). In 2011, the Florida
legislature increased employee contributions, increased age and service requirements
and limited cost-of-living increases (Florida Retirement System [FRS], 2013). The
Nevada model was selected as a representative of states where public employees do
not participate in social security and who have DB plans.
Starting Salary, Date, and Age
The research into the lifetime compensation of three different types of workers was
prepared using current salaries, as provided by the BLS (2012b) Occupational
Employment Statistics (OES) 2011 data. It is important to note that these data do not
include nonproduction bonuses, which could be more common in the private sector. It
is assumed that the workers are all age 23 when hired, and have not worked previously
in any position affecting retirement benefits.
For the purposes of the evaluation of the public sector DB plan with social security,
similar to the FRS (the “Florida Model”; 2013), which had major changes for new
employees starting after FY 2012 (i.e., July 2011, the middle of the calendar year), it
is assumed that these employees start after this point in 2011. The evaluation of public
sector compensation under a model that does not provide social security income
focused on the Public Employees Retirement System (PERS) in Nevada (the “Nevada
Model”; Nevada Public Employees’ Retirement System [NVPERS], 2013).
528 Public Personnel Management 42(4)
The private worker’s starting salary is determined by the weighted average of all
private sector positions within the 10th percentile annual salary (based on the North
American Industry Classification System, NAICS, sector). NAICS is the standard
used by Federal statistical agencies in classifying business establishments for the pur-
pose of collecting, analyzing, and publishing statistical data related to the U.S. busi-
ness economy.
Public sector wages are the 10th percentile of the OES designated public sector
employee. Finally, the nonsocial security employee’s salary is multiplied by 0.89385
to reflect the reduction in compensation for “payments in lieu” to the retirement fund.
This multiplier comes from Nevada PERS for those who chose an employer-paid
retirement plan. These “payments in lieu” represent a contribution to the state retire-
ment fund on behalf of the employee (BLS, 2012b).
Inflation and COLAs
To model inflation factors, the analysis utilized the last 20 years of Consumer Price
Index (CPI) data aggregated annually to find a geometric mean inflation rate of 2.49%.
For the years where there is historical inflation data (2011 and 2012), the historical
inflation figure was used for the inflation estimate (Economic Research Federal
Reserve Bank of St. Louis, 2013).
For public employees receiving in lieu payments, the analysis also assumes that the
COLAs increase at a rate faster than inflation. In some situations, rather than split the
cost-of-living increase with a lesser increase for more in lieu benefits, the employees
negotiate to receive the entire COLA, leaving the state with a burden above inflation.
As an example, a public employee who receives a $45,000 salary and $5,000 in wage
payments is eligible for a 2% COLA increase, or an extra $900. However, they observe
that they in fact earn $50,000, and the union negotiates the increase in COLA to a full
$1,000, leaving the employee with an extra $100 above the necessary inflation adjust-
ment, and the state with the full burden of contributing extra to the retirement fund.
This additional burden is estimated to be one half of the inflation rate times the in lieu
contribution rate each year (one half because the model assumes that the union suc-
cessfully negotiates this extra COLA payment only half of the time); (Economic
Research Federal Reserve Bank of St. Louis, 2013).
Step Increases and Longevity Pay
For all employee types, it is assumed a 5% annual increase in salary that is additive to
inflation adjustments for the first 8 years to reflect increases in experience and tenure
of employees (BLS Employee Benefit Survey, 2010). It is a common practice for
newly hired employees in the public sector to receive step increases as they gain expe-
rience. This may not be nearly as universal for the private sector employee; however,
this assumption is made to keep pay raises the same across all types. After this point,
the models assume that employees only receive increases in pay for inflation adjust-
ments and extra COLA increases. The analysis does not assume any longevity pay for
Reilly 529
public employees. According to the BLS (2012b), only 7% of public sector employees
still have access to longevity pay.
Social Security
The estimates of social security contributions assume the current 6.2% matching con-
tribution from employers and employees continues in the future. The analysis also
assumes employees become eligible to receive benefits at age 67, per the current
policy.
To calculate the expected starting benefit at age 67, the models use a social security
formula. First, the rate of increase for the Primary Insurance Amount (PIA) bend
points (the brackets used to determine benefit rates) and the Average Wage Index
(AWI; used to adjust earning for inflation) are assumed to grow at 3.0% annually
(Social Security, 2012). In the past 20 years, the PIA and AWI have grown at 3.45%
and 3.87%, respectively (Social Security, 2012). Based on the worker’s expected
annual salary, as calculated above, monthly earnings are calculated and then indexed
using the AWI from 2 years before eligibility (age 65, or 2052). Then, the average of
the 35 largest adjusted monthly incomes is utilized to find the average indexed monthly
earnings (AIME). The PIA bend points and the calculated AIME are then used to cal-
culate the expected social security benefit at retirement based on the current policy.
This benefit is then adjusted upwards by the expected rate of inflation every year
(Social Security, 2012).
401(k)
For the private sector employee model, the analysis assumes a 6% employee contribu-
tion with a 3% match from the employer, for a total of 9% annual contribution to their
401(k). In general, the employee’s portfolio is assumed to get more conservative as
retirement nears. Specifically, in the first 10 years, the model assumes that employees
earn a 7% annual return. The next 10 years, this assumes a 6% annual return. The third
10 years, this assumes a 5% annual return. After the 30 years total, but before retire-
ment, a 4% return is assumed. Finally, during retirement the employee is estimated to
earn 3.5% annually on the remaining principal balance (Internal Revenue Service
[IRS], 2013; Simpson, 2010).
Public Retirement Health Care Benefits
The analysis assumes that the public workers also receive a substantial health care
subsidy during retirement, with the following assumptions:
i. No Social Security Public Employees: For the base year, the model assumes a
$6,773 annual benefit (based on benefits currently received by Nevada public
employees). A 3.0% annual increase in this benefit is also assumed (Las Vegas
Chamber of Commerce, 2008).
530 Public Personnel Management 42(4)
ii. Social Security Public Employees: For the base year, a $1,800 annual benefit
is assumed (based on benefits currently received by Florida public employees).
A 3.0% annual increase in this benefit is also assumed (FRS, 2013).
Retirement Assumptions
The model for all three employee categories assumes that they retire when their non-
social security benefits first allow. The private sector worker will retire at age 59 when
the 401(k) allows for withdrawals without penalty. The public sector employee cov-
ered with social security will retire at age 56, when retirement in Florida’s retirement
system is without penalty after 33 years of service (FRS, 2013). Finally, the nonsocial
security employee based on Nevada PERS will retire after 30 years of service at age
53 (NVPERS, 2013).
For modeling purposes, the private sector employee is assumed to roughly match
the PERS employee in terms of timing by withdrawing from the 401(k), until they
match 71% of their final three salaries. Once the 401(k) is depleted, the private sector
employee will live solely on social security. If the 401(k) does not deplete, this will be
considered compensation at the end of life. The public employee with social security
will have one year of retirement without benefits. Both public employees, since they
do not have an account to draw on, will be dependent on the DBs from their retirement
plan, and it is assumed that they cannot withdraw from elsewhere to make up a gap
(IRS, 2013: Simpson, 2010).
It is assumed that all employees live through age 78. Living longer will likely ben-
efit the DB plans provided by the public sector, while shorter would likely favor the
DC plans of the private sector. The benefits provided under the Florida Model are
based on the average of the last 5 years of the employee’s salary. This average is then
multiplied by 1.68% times the number of years the employee has worked in the Florida
system (in this case, 38 years). This benefit is not adjusted for inflation, so in real
terms the employee will earn less each additional year he or she lives.
Nevada’s retirement system is based on the average of the last 3 years of the
employee’s salary. They make 71% of the last 3 years, and this is adjusted for inflation
after a ramp-up period where COLAs are limited. For modeling purposes, the assumed
ramp-up ends 7 years into retirement, when the COLA limit is above the long-run
inflation assumption (Las Vegas Chamber of Commerce, 2008; NVPERS, 2013).
Combined Compensation Calculations
Retirement payments, unless otherwise noted, are presented as the dollars paid during
retirement rather than the dollars paid toward retirement funds while working. To
reconcile this, a calculation of the total retirement compensation for a worker multi-
plied by the percent contributed by the employee is used to determine the adjusted
employee contribution amount. Subtracting these from the preretirement wages and
salaries and postretirement benefits paid is necessary to determine the total compensa-
tion provided by the company to the employee during their lifetime.
Reilly 531
Nominal Dollars Versus Inflation-Adjusted Dollars (2011)
The analysis looks at both inflation-adjusted and nominal dollar figures. As inflation
occurs, the same nominal dollar does not have as much spending power. The figures
are calculated in nominal dollars, but doing the same job in the future anyone will earn
far more in nominal terms than they would today. So, to combat the later years’ large
nominal figures, these dollar figures were discounted to account for inflation.
For example, in this model, the private administrative assistant earns $35,866 in
2019 after their last non-COLA raise in nominal dollars. However, in 2046, the same
administrative assistant adjusting only for COLA earns $69,737. Just adding these
figures would be misleading, as the $69,737 in 2046 would be just as valuable as the
$35,866 in 2019. So, to compensate, both of these figures were adjusted to $29,452 in
2011 inflation-adjusted dollars.
Findings
Administrative Assistant
Based on this analysis, a typical administrative assistant had slight differences in wage
and salary payments between public and private sector employee classifications.
However, they reported a more significant difference when assessing the level of ben-
efits for public employees.1
The private sector employee earned $1,015,989 in wages, salaries, and in lieu con-
tributions over their lifetime, while the public sector employee under the Florida
Model earned $1,014,647 and the public employee under the Nevada Model (without
social security) earned $926,686. However, because the public employee without
social security can retire after 30 years without penalty, he or she may only work until
age 53 and earn in salaries and in lieu payments on average $30,890, slightly more
than the regular public sector employee ($30,747) or the private sector employee
($28,222). See Table 1 for a wage and salary comparison.
Preretirement compensation measures wages plus funds as they are put into retire-
ment accounts; this may or may not include money put into retirement health benefits
for the public employees. The regular public sector administrative assistant made the
most in preretirement compensation with $1,118,547 over their lifetime. The private
sector employee made $1,109,460, and the public employee without social security
made $1,016,635. The length of work explains most of these differences, as the regu-
lar public sector employee works until age 56, the private sector employee works until
age 59, and the public sector employee works until age 53. However, these figures
should be considered not reflective of the actual benefits paid, the state pension plans
assume a higher rate of return than the individual likely will. In terms of average
annual preretirement compensation, the private sector employee only makes $30,818,
while the public sector employee without social security makes $33,888 and the regu-
lar public sector employee makes $33,895. See Table 1 for total compensation
comparisons.
532 Public Personnel Management 42(4)
In terms of retirement benefits, however, because the public sector employee with-
out social security had an expected 25 years of retirement, he or she received $684,418
in benefits paid out. This was more than the regular public sector employee ($565,776
over 22 years) and considerably more than the private sector employee ($334,914 over
19 years) could expect to receive during retirement. In spite of the pension and social
security benefits received, the average retirement benefit of the regular public sector
employee was $25,717. In comparison, the public employee without social security
made $27,377, and the regular private sector employee had $17,627 in retirement ben-
efits per year of retirement. Overall, the private sector employee paid directly for
57.0% of his or her retirement benefits, compared with a 56.0% contribution from the
regular public sector employee and no contribution from a public employee without
social security although that contribution comes from a reduction in salary. Nevada
Revised Statutes allow for employees enrolled in the employer plan to contribute $0
from the actual paycheck because they must take “lower salaries” in lieu of paying into
their retirement plans (Reilly, 2012). See Table 2 for total retirement benefits.
In terms of total compensation, when postretirement payments and employee con-
tributions are considered, the public sector employee without social security (Nevada
model) made $1,521,155 during 30 years of work, meaning an average compensation
of $50,705 per year. The public sector employee with social security (Florida model)
made $1,263,809 for 33 years of work with an average compensation of $38,297 per
Table 1. Secretaries and Administrative Assistants, Inflation Indexed to 2011.
Total compensation comparison
Private sector
employee
Regular
public sector
employee
No social
security public
sector employee
Wages and salaries
General wages and salaries $1,015,989 $1,014,647 $836,737
Longevity pay $0 $0 $0
In lieu of wage and salary payments $0 $0 $89,949
Total wages and salaries paid $1,015,989 $1,014,647 $926,686
Average annual salary $28,222 $30,747 $30,890
Average annual salary increase 1.12% 3.46% 3.70%
Retirement benefits
Employer-paid social security $62,991 $62,908 $0
Employer contributions to 401(k)
program
$30,480 $0 $0
Employer PERS contributions $0 $40,992 $89,949
Total employer-paid retirement benefits $93,471 $103,900 $89,949
Combined compensation levels $1,109,460 $1,118,547 $1,016,635
Average annual compensation level $30,818 $33,895 $33,888
Age eligible for retirement 59 56 53
Note. PERS = Public Employees Retirement System.
Reilly 533
year. Finally, the private sector employee earned $1,159,971 for 36 years of work,
with an average of $32,221 each year in compensation. See Table 3 for a comparative
analysis of compensation levels in both inflation-adjusted and nominal dollars.
Engineer
Similar to the executive assistant scenario described above, a typical engineer or archi-
tect reported slight differences in wages, but a large variance in benefits between clas-
sifications. The private sector employee earned $2,015,946 in wages, salaries, and in
lieu contributions over his or her lifetime, while the regular public sector employee
(Florida Model) earned $1,866,193 and the public employee without social security
(Nevada Model) earned $1,704,410. Retirement ages are modeled to remain the same
for both engineers and administrative assistants. The public employee without social
security can retire after 30 years without penalty, only working until age 53 and earn-
ing on average $56,814, comparable with the regular public sector employee ($56,551)
or the private sector employee ($55,999). See Table 4 for these wage and salary
comparisons.
In terms of preretirement compensation, the private sector employee made the most
with $2,201,414 in lifetime compensation. The regular public sector employee made $
2,057,291, and the public employee without social security made $1,869,849. The
length of work explains some of these differences, as the regular public sector
employee works until age 56, the private sector employee works until age 59, and the
public sector employee works until age 53. However, these figures should be consid-
ered not reflective of the actual benefits paid, the state pension plans assume a higher
rate of return than the individual likely will. In terms of average annual preretirement
Table 2. Secretaries and Administrative Assistants, Inflation Indexed to 2011.
Total retirement benefitsa
Private sector
employee
Regular
public sector
employee
No social
security public
sector employee
Retirement payments
Social security $184,759 $188,032 $0
401(k) distributions $150,155 $0 $0
PERS payments $328,647 $476,001
Postretirement health care benefits $0 $49,098 $208,418
Total retirement benefits $334,914 $565,776 $684,418
Average annual retirement benefit $17,627 $25,717 $27,377
Unpaid remaining in 401(k) $0 $0 $0
Age eligible for retirement 59 56 53
Number of years receiving benefits 19 22 25
Note. PERS = Public Employees Retirement System.
aAssumes both employees seek a retirement benefit equal to 71% of their last 3 years income.
534 Public Personnel Management 42(4)
compensation, the private sector employee only makes $61,150, while the public sec-
tor employee without social security makes $62,328, and the regular public sector
employee makes $62,342. See Table 4 for total compensation comparisons.
Table 3. Comparative Analysis of Compensation Levels: Secretaries and Administrative
Assistants.
Private sector
employee
Public sector
employee
Florida model
(with social
security)
Nevada model
(without social
security)
Age eligible for retirement 59 56 53
Inflation-adjusted dollars (2011)
Total compensation:
Preretirement wages and salaries $1,015,989 $1,014,647 $836,737
Postretirement benefits paid $334,914 $565,776 $684,418
Less: employee contributions $190,932 $316,614 $0
Total compensation $1,159,971 $1,263,809 $1,521,155
Share of benefits attributable to
employee contributions
57.0% 56.0% 0.0%
Variance to private sector ($) N/A $103,838 $361,184
Variance to private sector (%) N/A 9.0% 31.1%
Average annual compensation:
Based on total compensation
(55 Years)
$21,090 $22,978 $27,657
Based on total compensation (per year
worked)
$32,221 $38,297 $50,705
Variance to private sector ($) N/A 6,076 $18,484
Variance to private sector (%) N/A 18.9% 57.4%
Nominal dollars
Total compensation:
Preretirement wages and salaries $1,638,376 $568,745 $1,243,580
Postretirement benefits paid $1,008,520 $1,716,636 $1,957,905
Less: employee contributions ($574,951) ($960,648) $0
Total compensation $2,071,946 $2,324,733 $3,201,485
Share of benefits attributable to
employee contributions
57.0% 56.0% 0.0%
Variance to private sector ($) N/A $252,788 $1,129,540
Variance to private sector (%) N/A 12.2% 54.5%
Average annual compensation:
Based on total compensation (55 years) $37,672 $42,268 $58,209
Based on total compensation (per year
worked)
$57,554 $70,446 $106,716
Variance to private sector ($) N/A $12,892 $49,162
Variance to private sector (%) N/A 22.4% 85.4%
Note. N/A = not applicable.
Reilly 535
The public sector employee without social security (Nevada model) had an expected
25 years of retirement benefits and received $1,083,903 in benefits paid out, slightly
more than the regular public sector employee (Florida model; $941,982 over 22 years)
and considerably more than the private sector employee ($595,313 over 19 years) can
expect to receive in their retirement. The public employee without social security
(Nevada model) received $43,356 annually, the regular public employee (Florida
model) received $42,817 and the regular private sector employee had $31,332 in aver-
age annual retirement benefits. Overall, the private sector employee paid directly for
57.0% of their retirement benefits, compared to a 56.0% contribution from the regular
public sector employee and no contribution from a public employee without social
security (although their contribution comes from a reduction in salary). See Table 5 for
total retirement benefits.
When postretirement payments and employee contributions are considered, the
public sector employee without social security (Nevada model) was compensated
$2,622,874 for 30 years of work, meaning an average compensation of $87,429 per
year. The public sector employee with social security (Florida model) made
$2,281,032 for 33 years of work, with an average compensation of $69,122 per
year. Finally, the private sector employee earned $2,271,875 for 36 years of work,
with an average of $63,108 each year in compensation. See Table 6 for a compara-
tive analysis of compensation levels in both inflation-adjusted and nominal
dollars.
Table 4. Architects and Engineers, Inflation Indexed to 2011.
Total compensation comparison
Private sector
employee
Regular
public sector
employee
No social
security
public sector
employee
Wages and salaries
General wages and salaries $2,015,946 $1,866,193 $1,538,971
Longevity pay $0 $0 $0
In lieu of wage and salary payments $0 $0 $165,439
Total wages and salaries paid $2,015,946 $1,866,193 $1,704,410
Average annual salary $55,999 $56,551 $56,814
Average annual salary increase 1.12% 3.46% 3.70%
Retirement benefits
Employer-paid social security $124,989 $115,704 $0
Employer contributions to 401(k) program $60,478 $0 $0
Employer PERS contributions $0 $75,394 $165,439
Total employer-paid retirement benefits $185,467 $191,098 $165,439
Combined compensation levels $2,201,414 $2,057,291 $1,869,849
Average annual compensation level $61,150 $62,342.15 $62,328.32
Age eligible for retirement 59 56 53
Note. PERS = Public Employees Retirement System.
536 Public Personnel Management 42(4)
Discussion and Conclusion
This comparative model involving public-versus-private sector compensation that
evaluates the cost of lifetime compensation contributes to the ongoing debate over
public-versus-private sector pay and benefits. Examining both active employment and
postretirement years provides a different insight into this ongoing debate. The model
explores, at the end of the day, whether public employees end up with more wealth
than their counterparts in the private sector.
For the two occupation scenarios analyzed, total compensation of public employees
(when postretirement payments and employee contributions are considered) is higher
than that of an average private sector employee. When total compensation is based on
years worked, the divide between the public and private sectors increases significantly.
While preretirement compensation levels were comparable between the two sectors
for the administrative assistant and more for the private sector engineer, the retirement
benefits of public sector employees for both occupations are far greater than their pri-
vate sector counterparts. These postemployment benefits earned over a lifetime led to
the higher total compensation for the public employee in both occupations.
Part of the reason total lifetime compensation is more for the public employees
(both with and without social security benefits) when compared with their private sec-
tor counterparts is twofold: Public employees are able to retire on average 5 years
earlier than their private sector counterparts (Clowes, 2004); and there were more
generous retirement payouts in the public sector. It is worth noting in this model that
public sector employees under the Florida Model (with social security benefits) can
retire at age 56 (3 years earlier than a private sector employee), while the public sector
Table 5. Architects and Engineers, Inflation Indexed to 2011.
Total retirement benefitsa
Private sector
employee
Regular
public sector
employee
No social
security public
sector employee
Social security $297,454 $288,420 $0
401(k) distributions $297,860 $0 $0
PERS payments $0 $604,464 $875,486
Postretirement health care
benefits
$0 $49,098 $208,418
Total retirement benefits $595,313 $941,982 $1,083,903
Average annual retirement
benefit
$31,332 $42,817 $43,356
Unpaid remaining in 401(k) $0 $0 $0
Age eligible for retirement 59 56 53
Number of years receiving
benefits
19 22 25
Note. PERS = Public Employees Retirement System.
aAssumes all employees seek retirement benefit equal to 71% of their last 3 year’s income.
Reilly 537
employee under the Nevada Model (no social security benefits) can retire at age 53. In
addition, the retirement benefits of public sector employees significantly outpace ben-
efits received for their private sector counterparts. Increased benefits for the public
sector employee can be explained due to a DB pension fund that can generate a con-
sistently higher return than the individual who requires an investment strategy that is
far more conservative as retirement nears. As previously mentioned, most public
Table 6. Comparative Analysis of Compensation Levels: Architects and Engineers.
Public sector employee
Florida model
Nevada
model
Private sector
employee
With social
security
Without
social security
Age eligible for retirement 59 56 53
Inflation-adjusted dollars (2011)
Total compensation
Preretirement wages and salaries $2,015,946 $1,866,193 $1,538,971
Postretirement benefits paid $595,313 $941,982 $1,083,903
Less: Employee contributions ($339,384) ($527,143) $0
Total compensation $2,271,875 $2,281,032 $2,622,874
Share of benefits attributable to employee
contributions
57.0% 56.0% 0.0%
Variance to private sector ($) N/A $9,156 $350,999
Variance to private sector (%) N/A 0.4% 15.4%
Average annual compensation
Based on total compensation (55 years) $41,307 $41,473 $47,689
Based on total compensation (per year worked) $63,108 $69,122 $87,429
Variance to private sector ($) N/A $6,014 $24,321
Variance to private sector (%) N/A 9.5% 38.5%
Nominal dollars
Total compensation
Preretirement wages and salaries $3,250,900 $2,885,320 $2,287,258
Postretirement benefits paid $1,771,077 $2,844,710 $3,098,054
Less: Employee contributions ($1,009,680) ($1,591,930) $0
Total compensation $4,012,298 $4,138,100 $5,385,313
Share of benefits attributable to employee
contributions
57.0% 56.0% 0.0%
Variance to private sector ($) N/A $125,802 $1,373,015
Variance to private sector (%) N/A 3.1% 34.2%
Average annual compensation:
Based on total compensation (55 years) $72,951 $75,238 $97,915
Based on total compensation (per year worked) $111,453 $125,246 $179,510
Variance to private sector ($) N/A $13,944 $68057
Variance to private sector (%) N/A 12.5% 61.1%
Note. N/A = not applicable.
538 Public Personnel Management 42(4)
pension plans guarantee retirees a set income for the rest of their lives, indexed for
inflation. In addition, many public employees have access to subsidized retiree health
care that requires little or no co-payment. These types of benefits have mostly disap-
peared in the private sector. As a result, public sector employees do not assume invest-
ment risk of their pensions similar to that of workers in the private industry (Schneider,
2005). This is in sharp contrast to the investment loses by many private sector workers
with individual plans during the recession.
It is important to stress that the occupations analyzed in both the public and private
sectors are unique. That being said, one must demonstrate caution before assuming
that all public sector employees earn more in compensation than a private sector coun-
terpart does. This model was built to display differences in the various compensation
tools used by employers in both sectors of an economy. One cannot use the model and
its inputs to assume that the outputs are concrete on a national or even regional level.
Comparing compensation packages is not easy. The 401(K) is exposed to market risk;
the pension to political risk (i.e., retirees may see their pension cut or COLA reduced
or eliminated). In addition, there are other forms of risk-based compensation: risk of
being fired (job security) and risk of variable benefits (different risks with pay raises,
bonuses, stocks, stock options). Competitive markets are more likely to compensate
for these risks. Furthermore, there are differentials in the cost of plan administration.
DB plans in government cost more to administer than the DC plans in the private sec-
tor, with large portions of the latter being funded directly by means of fund fees.
Nevertheless, the model can be used as an effective tool to more clearly understand
total compensation levels at the local level where the inputs can be defined more pre-
cisely. The model can also be used to more fully understand and disclose positive or
negative impacts on employee compensation, especially when tweaking variables.
The issue of public sector pay and benefits has been a topic that has received a good
deal of attention from state and local elected and public officials. The majority of
states have recently passed some type of pension reform in the last several years.
Lawmakers have enacted changes to increase employee contributions; increase age
and service requirements for retirement; limit cost-of-living increase and cap benefits
for new employees (Snell, 2012). Many retirement experts and public officials have
reached the conclusion that even with stronger market returns, public pension systems
will not be able to cover retiree benefits in the long term without some type of combi-
nation of raising taxes, significant benefit cuts and/or changing how retirement plans
are structured and designed (Barro, 2012; The PEW Center on the States, 2012). With
the realization that reducing benefits for new employees will not be enough to keep
pensions solvent, some state and local governments have turned to reducing benefits
for current retirees and employees. According to Barro (2012), as the number of
reforms has increased, so has their aggressiveness. Early reforms by state and local
governments applied only to future hires (which did little to address current budget
gaps); however, recent reforms have applied more to current workers and even retir-
ees. The continued focus on public pay and benefits will intensify the reexamination
on how public sector employees are compensated. In light of this analysis, several
important public policy issues are worth exploring.
Reilly 539
First, given the reality of increased life expectancy, retirement plans that encourage
retirement while an individual is in his or her 50s should be viewed with a great deal
of concern. From both psychological and financial perspectives, working into ones 60s
and 70s is necessarily an emerging reality (Frank, Gianakis, & Neshkova, 2011; The
Economist, 2011). In this analysis, one of the primary reasons the divide between life-
time compensation for public employees increased significantly over their private sec-
tor counterparts when years worked was considered was due to the ability of public
workers to maximize their payout and collect their retirement with no penalty at an
earlier time period than private workers. There seems to be no justification for public
sector employees retiring sooner than private sector ones (excluding perhaps public
safety workers). As mentioned earlier, in preparation for the rising rate of retirees,
governments are already beginning to raise the age of retirement to offset pension
costs. Not only is the United States facing a serious pension debt, but also life expec-
tancy is continuing to rise. Since 1971, life expectancy has increased by 4 or 5 years
and is projected to increase an additional 3 years by 2050 (The Economist, 2011).
People are living longer and retiring earlier. The average age of retirement for all
workers in the United States in 2011 was 63, which is almost an entire year younger
than in 1970 (The Economist, 2011). Raising the retirement age can give the employee
more years of wages while allowing governments to gain more in taxes and paying out
less in benefits,
There also may be a need to reevaluate how to compensate and reward public
employees. Is public pay too heavily skewed toward deferred compensation such as
pensions, retiree health care, and other postretirement benefits? The practice of pro-
viding deferred compensation has been carried out in ways that often hide a full
accounting of the costs from the public and pushes a significant amount of the costs
onto future generations of taxpayers, elected officials, and public managers. The result
has been to transfer current fiscal deficits into future debt, with interest.
In addition, are current public sector pay schemes the most effective compensation
strategy needed to attract an emerging workforce of young people whose skills are
needed by the public sector to address a myriad of complex and intractable problems
facing communities? Very few public employees are eligible for bonuses, profit shar-
ing, or other strategies utilized in the private sector to reward performance and innova-
tion and to compensate for salary and wage limits in a public civil service system
(Coggburn & Kearney, 2010). A challenge with the DB plan, which is the primary
pension plan for public workers, is its general lack of portability (Clark & McDermed,
1990). It contributes to workers staying with one employer, no matter how unhappy or
unproductive they are, or how much they desire to move because they often want to
maximize their retirement payout and/or are financially penalized by leaving early.
This has been commonly referred to as “golden handcuffs.” Increasingly, younger
employees tend to move around from job to job, city to city, and state to state in search
of new opportunities, promotions, and experiences.
Some state and local governments are experimenting with DC, hybrid or cash-bal-
ance plans. Hybrid plans are a mix of DB and DC plans. Hybrid plans emerging are
designed to limit risk and market volatility in order to provide retirement security for
540 Public Personnel Management 42(4)
employees. These approaches give employees the upside of a 401(k) style plan such as
portability and the ability to roll over retirement savings when the worker changes jobs
without the downside of potential significant investment loses. Under cash-balance
plans, workers get an individual retirement account that both the employee and the
employer contribute to, while the employer guarantees a minimum return. Cash-
balance plans have many positives in that employees are automatically enrolled, ben-
efits are guaranteed, returns are secure, and assets are portable (Cahill & Soto, 2003).
The trade-off is that these plans have lower expected returns than a DC and they pay
benefits in a lump sum. Some critics have argued that midcareer changeovers discrimi-
nate against older workers who have spent many years working for the same employer
(Johnson & Uccello, 2002). Based on concerns of age discrimination, the IRS placed
a moratorium on these plan conversations in 1999; however, it was ended with the
passage of the Pension Protection Act (PPA) of 2006 that clarified the legal status of
cash-balance plans and provides safe harbor for these plans (D’Souza, Jacob, &
Lougee, 2013).
In addition to the realization that many traditional DB plans with guaranteed pen-
sion income for state and local governments are not affordable or sustainable, these
plans may no longer be the best choice for today’s more mobile workforce. DC,
hybrid, and cash-balance plans have the potential to be much more appealing to
younger populations that desire more flexibility in their retirement accounts. Younger
workers may prefer more portable plans to accommodate their career trajectories.
Likewise, workers with a series of relatively short-term jobs and those who prefer not
to work for a single employer for their entire career may also prefer these more flexi-
ble plans. It has also been argued that woman may benefit more from non-DB plans
given they tend to have employment histories with shorter duration and more gaps in
their employment participation than men (Blau & Kahn, 2006). Moving public sector
employees to these types of systems allows these benefits to follow workers if they
choose to switch jobs and move to the private, nonprofit or to another public sector job
and reduce the incentive to stay at one job for an entire career. They also can increase
the active participation of public employees in the retirement planning, while transfer-
ring some of the risk away from the taxpayer. Further, there is evidence that the
absence of age-related incentives in DC plans leads workers to retire later when com-
pared with employees with DB plans (Friedberg & Webb, 2005). Different types of
pension plans appeal to different demographics. Public managers need to factor this
into their human resource decision-making.
In conclusion, this model does not end the debate on comparative compensation
analysis. It is a tool that helps illustrate the impact of lifetime compensation and how
a DB pension, retiree health care and early retirement can increase the divide between
the two sectors. The continued debt surrounding public pensions in the United States
will ensure the issue of comparable pay between the two sectors remains in the fore-
front of public policy debates. Designing compensation systems that are sustainable
and allow for both the recruitment and retention of a competent workforce while pro-
viding some level of protection for those in the retirement years should be a concern
for both the public and private sectors.
Reilly 541
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship,
and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of
this article.
Note
1. All values presented below are inflation adjusted to 2011 dollars (reference not repeated).
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Author Biography
Thom Reilly is professor at San Diego State University; former chief executive officer/county
manager for Clark County, Nevada; a fellow of the National Academy of Public Administration;
and author of the book Rethinking Public Sector Compensation: What Ever Happened to the
Public Interest? (M. E. Sharpe, 2012). He received his master’s and doctoral degrees in public
administration from the University of Southern California.
... Given these and other variables, it comes as no surprise that findings on publicprivate pay differentials are generally inconclusive. A number of studies find that public employees are underpaid relative to their private sector counterparts (e.g., Lewin, Keefe, & Kochan, 2012;Schmitt, 2010) but others find they are overpaid (e.g., Gittleman & Pierce, 2011;Lee & Thompson, 2012;Reilly, 2013). Other studies find compensation differentials are more nuanced and may depend on factors like location (Biggs & Richwine, 2014;Taylor, 2008) or occupational grouping (Miller, 1996). ...
... Consideration should also be given to how different jurisdictions integrate education, productivity, and performance evaluations into compensation. Only then can "true" public-public or public-private comparisons be drawn, as fringe benefits may satisfy if not exceed any observed salary disparities (Reilly, 2013) and reduce turnover (Llorens & Stazyk, 2011). ...
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Growing competition over human capital has reiterated the importance of strategic practices to maintaining a high-quality public sector workforce. But how often does the public sector study pay and benefits among competitive peers? This study presents the findings of a national survey of human resource professionals regarding compensation benchmarking practices. Just over half of respondents indicated they conducted a benchmarking study within the last decade. A majority said their jurisdiction only compares compensation with other public employers, with a smaller number including both public and private competitors. Salaries were the most frequent topic of concern; fringe benefits and paid leave time were less often compared. Several jurisdictions conducted benchmarking studies for purposes other than compensation; about one quarter gathered data for purely informational purposes and 9% carried out a study in anticipation of labor negotiations. A series of best practices for benchmarking studies is offered in conclusion.
... Retirement benefits are a strong employment incentive for workers in public and private sectors alike (Goldhaber et al. 2015;Gustman et al. 1994;Steinmeier 2002a, Haverstick et al. 2010). Public sector employment, in particular, depends on the combination of wages and retirement benefits, with workers recognizing a tradeoff between lower wages now and higher retirement benefits in the future (Borjas 2002;Ippolito 2002;Munnell et al. 2015;Reilly 2013a). In addition to being a powerful recruitment tool, employer-provided pensions facilitate human resource management by improving worker motivation and decreasing turnover (Allen et al. 1991;Chalmers et al. 2014;Even and MacPherson 1996;Frazis and Loewenstein 2013;Lazear 1986;McCormick and Hughes 1984). ...
... Over 85% of all public workers are employed by state and local governments (BLS 2017). A vast majority of the state and local workers, including teachers as the largest category of local workers, are covered by stateadministered retirement systems, which cumulatively manage over 85% of all assets in public retirement plans (USCB 2016b). 1 Traditionally, public sector post-employment benefits have been more generous than similar benefits in the private sector and have helped maintain public sector appeal by compensating workers for relatively lower wages (Coggburn and Kearney 2010;Ippolito 1987;Naff et al. 2014;Reilly 2013b, Poterba et al. 2007). For many years, having a job in the public sector meant having more job security, a better pension, and more opportunities for upward mobility (Laird 2017;Gallup 2015;Hollister 2011;Llorens et al. 2008). ...
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Over the past decade, many states have reformed their retirement systems by reducing benefit generosity, tightening retirement provisions, introducing non-defined-benefit (DB) plan options and even replacing DB plans with defined-contribution plans. Many of these reforms have affected post-employment benefits that public workers will receive when they retire. Have these reforms also affected the attractiveness of public sector employment? To answer this question, we use state-level data from 2002 to 2015 and examine the relationship between state pension reforms and public employee turnover following the reforms. We find that employee responsiveness to the reforms was tangible and that it differed by reform type and worker education. These results are important because the design of public retirement benefits will continue to influence the ability of the public sector to recruit and retain high-quality workforce.
... In this sector pension is mostly defined contribution. Public employees receive increasing fringe benefits over wages because the costs are less transparent to the community (Reilly 2013). They are compensated for two services: public services and political services. ...
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The paper studies knowledgebase and competitiveness of selected countries from all the continents and finds that countries with lower scores in the above knowledgebase pay higher salaries and benefits to the public sector employees. Their public-private pay gap is also higher. These countries also overstaff their public sector organizations. The paper also studies reporting and financial disclosure of selected nationally important public sector organizations of these countries. These organizations also report and disclose very little. Most of these countries are also found to be faith-based. The study takes UNDP, UNESCO, WIPO and World Bank for knowledge and competitiveness rankings, and budget documents of the respective countries for public sector pay and public expenditures. The study period is 2018-19. The results are mixed, partly consistent and partly inconsistent with the previous literature. One important finding of this paper is that although in macro level (country level) Saudi Arabia, UAE and Chile stand in the middle and upper middle regarding knowledgebase and competitiveness, in micro level (organizational level) disclosure and financial reporting of these countries is very poor.
... The work that does exist has tended to focus on the broader issue of assessing the relative generosity (or lack thereof) of public sector compensation compared to private sector compensation. In terms of recent evidence, Reilly (2013) contends that an average 'blue-collar' public sector worker will be better compensated working for the public sector over his or her lifetime than working in the private sector. This is in contrast to Brewerunge and Rosen (2013) who find no statistically significant difference in total compensation for state and local government workers with similar characteristics using a matched sample of workers over the age of 50 from the Health and Retirement Study. ...
... Llorens (2008) argued that high quality workforce significantly contribute in creating competitive public sector. Similarly, Reilly (2013) posited that for a public sector to perform it task to the fullest, they need competent and capable work force. But, Yeazdanshenas (2014) discovered that lack of efficiency among workers in public sector could produce numerous challenges to a given country. ...
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Readers/Learning Objectives  To understand the importance of higher education in Nigeria using functionalists perspectives.  To identify the roles of federal universities in the production of manpower in Nigerian societies.  To examine the historical development of universities in line with the level of graduate productivity in Nigeria  To understand Nigerian education system and how it has helped in producing a self-reliant individual.
... In another study by Reilly (2013) to compare public sector with private sector pay and benefits indicates that total compensation of public employee is higher that of average private employee. In addition to this, when the total compensation is based on number of years worked, there is significant increase in the gap between the public and private sector. ...
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This paper aims to comparatively analyze public private wage differentials in Mogadishu, Somalia. The secondary data used in this study is derived mainly from documents analysis such as national wage and salary structure for public servants and the payroll data of some selected private companies and of both and nonprofit organizations in Mogadishu, Somalia. The study is particularly significant because it is the first of its kind in Somalia aimed at analyzing and comparing wages between public and private sector in Somalia. The finding of the analysis indicates earning gap exist between public, not for profit organization and that of private sector and specifically the earning gap is significant among employees working in not for profit organizations and those in private sector. Furthermore, the study also shows the existence of wage differentials within each sector itself. Finally, the study suggests some policy recommendations that are useful in solving the wage differentials.
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This article examines government employees’ experience and expectation of socioeconomic hardships during the COVID-19 pandemic—employment income loss, housing instability, and food insufficiency—by focusing on the role of gender and race. Employing the Household Pulse Survey, a nationally representative and near real-time pandemic data deployed by the U.S. Census Bureau, we find that government employees were less affected by the pandemic than non-government employees across socioeconomic hardships. However, female and racial minorities, when investigated within government employees, have a worse experience and expectation of pandemic hardships than men and non-Hispanic Whites. Our findings suggest a clear gender gap and racial disparities in the experience and expectation of pandemic hardships.
Compensation systems serve a critical role in strategic human resources management, and over the past twenty-five years, there have been an increasing number of public sector reform efforts aimed at better aligning compensation practices with institutional workforce needs. While many past reforms have been performance driven, the nation’s most recent economic downturn has served as potent catalyst for a renewed focus on public sector compensation, particularly reforms to public sector retirement benefits. However, given the traditional importance of public sector retirement benefits within broader bureaucratic structures, these new reforms hold the potential to substantially alter human capital capacity in the public sector. Using wage and retirement benefit data from the U.S. Census Bureau’s Current Population Survey and National Compensation Survey, this paper finds that state and local governments face significant threats to their long-term human capital capacity in light of potential benefit reforms that place a disproportionate emphasis upon competitive wage rates.
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Unfunded liabilities of pension plans sponsored by state and local governments have drastically increased in the past few years. This article examines the potential challenges faced by states and municipalities in meeting their pension obligations and explores the cost and benefits of a switch from traditional defined benefit (DB) plans to defined contribution (DC) plans. The authors draw on the experience of the private sector to depict the potential cost savings for governments and the likely impacts on employees. The authors also identify several issues that are unique to governments if a shift in pension coverage plans is to occur. One of the attractions of public sector employment has been the generous benefits offered; the authors examine whether it will be harder to recruit people in the public sector if the government does not offer DB pensions. The authors explore equity issues and the effects of eroding political support for public sector DB systems in light of their demise in the private sector. The authors also address the issue of financial illiteracy in the work place and its impact on the human resource function in the context of DC plan implementation. Finally, the authors pose critical questions regarding DC plan rollout and its inherent difficulties.
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The research reported in this article shows that public employees, both state and local government employees, are not overpaid and may be slightly undercompensated. Comparisons with the private-sector employees that control for education, experience, hours of work, organizational size, gender, race, ethnicity, and disability indicate that the public-employment compensation (wages and benefits) penalty is relatively small. On average there is a 3.7 percent penalty in total compensation for full-time state and local employees when compared to similar private-sector employees. The data analysis also reveals substantially different approaches to staffing and compensation between the private and public sectors. On average, state and local public-sector workers are more highly educated than the private-sector workforce; 54 percent of full-time state and local public-sector workers hold at least a four-year college degree compared to 35 percent of full-time private sector workers. For college-educated labor, state and local governments pay salaries on average over 25 percent less than private employers. The public sector appears to set a floor on compensation, particularly improving the compensation of workers with high-school educations, when compared to similarly educated workers in the private sector. Benefits are allocated differently between private- and public-sector full-time workers. State and local government employees receive a higher portion of their compensation in the form of employer-provided benefits. Public employers provide better health insurance and pension benefits. National polling data indicate that the public does not believe public employees are overpaid. They oppose pay and benefit cuts, but believe pay freezes and greater employee contributions to their health and pensions plans may be appropriate. Nevertheless, thirteen states revised their public-sector collective-bargaining laws, mainly weakening employee bargaining power or severely restricting or eliminating collective bargaining, while the majority of the public opposed those changes.
Book
Designed as a comprehensive overview of public sector compensation, the book addresses strategies for change, with the author warning that failure of the profession to address this issue will ultimately lead to citizens taking matters in their own hands. The author's issues-oriented approach addresses his core messagethat the escalation of public sector compensation is impacting the ability of government to meet its core responsibility and the failure of government to address this has serious consequences. Not just a critique, it presents context, analysis, and suggestions for reform.
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Although the average wage is higher for workers in State and local governments, professional and administrative workers typically earn more in the private sector.
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The pension plans of U.S. state, county, and municipal employees play a large role in capital markets and corporate governance debates. Recent studies have investigated the governance, management, and performance of these plans, as well as their role in corporate governance. Informed by the findings of its integrative literature review, the article outlines several key considerations regarding the plans, including ones regarding the bearing of investment risk, public and private plan differentials, the presence and responsibilities of boards of trustees, and investment policy. The outlined considerations favor an appropriate balance between political and economic controls of the plans and recognize that the activism of public pension plans as institutional investors might improve the corporate governance system for all investors.