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The War on Public Sector Workers

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Politicians across the country are using heaping doses of the politics of envy to try to arouse the anger of workers. However, their targets are not the corporate CEOs pulling down tens of millions of dollars a year in pay and bonuses. Nor is it the Wall Street crew that got incredibly rich inflating the housing bubble and then took government handouts to stay alive through the bust. The targets of these politicians' wrath are school teachers, firefighters and other public sector workers.

They are outraged that many of these workers still earn enough to support a middle-class family. Even more outrageous, many of these workers have traditionally defined benefit pensions that assure them of a modicum of comfort in retirement. Having managed to ensure that most workers in the private sector did not benefit much from economic growth over the last three decades, the same upward redistributionist crew is turning their guns on public sector workers.

There are two major deceptions in their story. First, after working to eliminate traditional pensions in the private sector, they now tell us that getting a pension in the form of a guaranteed benefit is hugely more valuable than having the same money placed in a 401(k)-type defined contribution account. Second, after shoving stock down everyone's throat in the bubble years, they now tell us we cannot expect a very good return from investing pension funds in the market.

Starting with the pension story, it is really touching to hear conservatives singing the virtues of defined benefit pensions. They argue that if a state or local government puts $1,000 a year in a defined benefit pension and guarantees the market return for its workers, this is hugely more valuable than if it takes the same $1,000 a year and puts it into a 401(k) type account.

Since most public sector workers still have defined benefit pensions, this is a central part of their story about public sector workers being overpaid. By their calculations, the $1,000 that a government puts into a defined benefit pension today should be counted as being worth close to $2,000 since the government guarantees the return. Doing the math this way goes a long way toward showing that public sector workers are overpaid.

There are a few points that jump out here. First, it is amazing to hear many of the same people who touted the replacement of defined benefit pensions with 401(k) accounts now tell us about the great value of a guaranteed pension. When we do the math their way, it means that ordinary workers have even less to show from economic growth over the last three decades, since so many workers have lost pensions in this period.

The complaints of these conservative economists also make great reading when put side-by-side with their plans to privatize Social Security and get rid of its guaranteed benefit. When we were talking about cutting back protections for hundreds of millions of workers and their families we were not supposed to take into account the value of a guaranteed benefit. Now that we are talking about cutting the pay of public sector workers, it is essential to include the value of the guarantee in the calculation. Is it any wonder that so many people have contempt for economists?

Finally, it is important to keep our eye on the ball here. The extra value comes from the guarantee. There is no gain to the government if it replaces pensions with 401(k) accounts as many have advocated and some governments have done. The argument is not that the state is paying too much; the argument is that the worker is getting too much because of the value of the guarantee. If we eliminate a guaranteed benefit we have just taken away the workers' retirement security, we have not saved the taxpayers a penny.

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The other part of the story is the claim that the returns being assumed by public pensions on their investments are overly optimistic. This one is really, really painful.

Some of us were making this argument at the top of our lungs back in the late '90s, when price to earnings ratios in the stock market were over 30. We continued to make this argument in the last decade when price to earnings ratios were still well into the 20s, far above historic averages. However we couldn't get anyone to listen back then, because the complaint about exaggerated stock returns did not fit the agenda of the upward redistributionists.

Now that the upward redistributionists have put the attack on public pensions at the top of their agenda it is convenient to raise concerns about overly-optimistic returns. However, now that the stock market has plunged (pensions have already taken their hits) their concerns are wrong. In fact, pension funds are being very reasonable in their return projections. Those familiar with arithmetic know that it would be almost impossible for them to earn a substantial lower rate of return, barring a complete collapse of the economy.

So, welcome to the latest episode in the long-running battle to redistribute ever more income to the rich. Having already achieved great success in depressing the pay of workers throughout the private sector, the call is to cut the pay and benefits of workers in the public sector. Won't you join the cause?

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Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. (more...)

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