Exploding Public Pension Costs Hit Public Employee Wages

In the past, the Manhattan Institute has effectively highlighted how rising California public pension costs are cutting into “basic infrastructure maintenance, public safety, education, and quality-of-life services such as parks and libraries.” But in the newest report, “Pension Costs are Crowding Out Salaries,” by Senior Fellow Stephen D. Eide, the Manhattan Institute reveals how California public employees themselves are suffering. In a decade where pension costs rose by 135 percent and healthcare premiums by 85 percent, public sector wages grew 4.6 percent slower than private sector workers’ salaries.

Public pensions in California are among the richest in the nation, and union resistance to shifting more costs to deductibles and co-pays has caused government employers’ insurance premium expenses to climb faster than in the private sector.

Local government staffing levels in California also “remained eight percent below where they were in December 2007,” according to the report, while “private-sector job levels…were 2.4 percent higher.” But current employee salaries are being trimmed and their benefits have been lowered to subsidize the cost of retirees and older public workers’ benefits.

Thanks to California’s Public Employees’ Pension Reform Act of 2013, state, county and municipal government entities have found themselves forced to divert revenues to backfill pension promises made to prior generations of employees.

Pension reformers’ claims that they are not anti-worker are starting to resonate with younger public employees. The Manhattan Institute suggests a reformed pension system should be one better-positioned to make good on its promises. They point out that legal guarantees have amounted to little when there was no money left in bankrupt Rhode Island, Central Falls, Pritchard, Alabama and Detroit.

California public employees claim they have some of the “strongest legal prohibitions against pension changes in the nation.” But when governments can’t touch pensions, they have been hitting younger workers with furloughs, lay-offs and reduced pay grades. The Manhattan Institute concludes that “guaranteed “retirement security” for some is only possible at a cost of job and wage insecurity for others.

Public employees have already lost the “the public’s hearts and minds.” The most recent Reason-Rupe Public Opinion Poll found that “private sector workers—who largely fund government workers’ defined benefit pensions—strongly favor shifting current employees to 401k style accounts by a margin of 65 to 31 percent.”

Interestingly, a slimmer majority of government workers “would also favor such a reform if it only applied to future government workers, and not themselves” by 54 percent in favor to 43 percent opposed. Younger government workers are painfully aware that they are paying a steep price to subsidize retirees and older workers who have substantially better benefits than they will ever achieve.

When the Reason-Rupe survey asked respondents if they would favor 401k-style accounts for government workers if it meant “benefits were not guaranteed and would depend on how well the employees and government save and invest,” 57 percent of private sector workers continue to favor such a transition. But 61 percent of public employees would oppose this move.

The Manhattan Institute adds: “The most persuasive case for pension reform remains the effect on services and government budgets more generally. Perhaps union leadership and members will never come around, but the facts remain. Unchecked growth in pension costs means lower wages for government employees.”