Retirement reality is scary for many Americans.
Sadly, the reality is that nearly all Americans should adjust their working years lifestyle so that lifestyle or as close to it as desired can be maintained throughout retirement.
The percentage of workers covered by a traditional defined benefit (DB) pension plan that pays a lifetime annuity, often based on years of service and final salary, has been steadily declining over the past 25 years. From 1980 through 2008, the proportion of private wage and salary workers participating in DB pension plans fell from 38 percent to 20 percent (Bureau of Labor Statistics 2008; Department of Labor 2002). Source: SSA.gov
The peak was about 50% covered in 1960 according to the BLS. Today only about 15% of private sector workers have a defined benefit pension. However…
Most state and local government employees (86 percent) had access to a defined benefit (DB) pension plan in 2022, and 87 percent of those workers participated in the DB pension plans. These public pension plans typically provide pensions based on members’ years of service and average salary over a specified number of years of employment.
Many members also receive cost-of-living adjustments that help maintain the purchasing power of their benefits in retirement. By contrast, in the private sector, where defined contribution (DC) or 401(k)-style plans dominate, only 15 percent of workers had access to a DB plans in 2022 and 74 percent of those with access participated.
State and local pensions have attracted considerable attention in recent years. Inadequate contributions have left pension plans underfunded by at least $1.6 trillion, though estimates vary depending on modeling assumptions.
Source: Urban Institute
QUINNSCOMMENTARY 
It is very well known that public sector workers are paid a higher proportion of their compensation as benefits, while their salaries are less than similar private sector workers.
Not as well known, in total compensation, salary plus benefits, are public workers paid more than private workers? Trick question:
“the “average” public employee is overpaid by 30% (Genest), 72% (Heritage), 100% (CPC), 17% (CBO) or 10% (Biggs national average)
Beware the flaw of averages.
All detailed studies agree:
Lower paid government workers (generally high school education, or less) earn more than equivalent private sector workers. A lot more, actually, mainly due to pensions and healthcare.
Higher level public workers, doctors, lawyer, engineers, etc., earn much less than equivalent private sector, mainly due to lower salaries.
Logically, and empirically verified, there is a middle group who earn about the same, more or less, than equivalent private sector employees. The public workers typically have lower salaries, compensated by better benefits.
How much? From the Biggs study, from recollection, lower paid public workers make 20+/-% more than private.Higher paid workers make 20+/-% less than private.Note: compare 20% of $50,000 to 20% of $150,000.
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Humor me, the following is rather long, it is a comment I posted several years ago at…
https://www.hoover.org/research/140000-year-why-are-government-workers-california-paid-twice-much-private-sector-workers
Stephen Douglas > Tough Love3 years ago
Michael Genest
Chief financial officer for Arnold Governor Schwarzenegger. When he retired, formed Capitol Matrix Consulting. One of their first jobs (following the 2008 crash and recession) was a study comparing public and private pay in California.
They determined California state employees were overpaid by about 30 percent.* When asked about his own compensation, Genest replied: “We could have made a lot more money in the private sector. We are making more money.”
All three partners of CMC were retired state workers with pensions over $100,000/year. (That was back in 2010, when $125,000 was a lot of money.)
He was most likely correct, as documented by Biggs and others, all three being in the “professional/PhD” category.
If you’re so smart, why aren’t you rich?
Or it’s obverse:
If you’re so rich, why aren’t you smart?
“First, and most basically, the wage penalty or premium that a state government pays is not uniform throughout the distribution of workers employed by the government. It is generally believed that, due to the relative compression of wages paid in government, public employment is relatively more favorable to lower-skilled employees and less favorable to high-skill workers.”
Biggs, Overpaid or Underpaid? A State-by-State Ranking of Public- Employee CompensationApril, 2014
That phrase is common to many comparison studies, and looks like a boilerplate disclaimer, but may in fact be the understatement of this century.
How much more favorable?CBO, “Comparing the Compensation of Federal and Private-Sector Employees, 2011 to 2015”
WAGES:“Overall, the federal government would have reduced its spending on wages by 3 percent if it had decreased the pay of its less educated employees and increased the pay of its more educated employees to match the wages of their private-sector counterparts.” (p.2)
TOTAL COMPENSATION:“Overall, the federal government paid 17 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector, after accounting for certain observable characteristics of workers.”(p.3)
No suggestion of “reducing spending” by decreasing benefits of the less educated (and increasing benefits of the more educated?)
because…
“Among workers with a high school diploma or less education, total compensation costs averaged 53 percent more for federal employees than for their private-sector counterparts.”
“Total compensation costs among workers with a professional degree or doctorate, by contrast, were 18 percent lower for federal employees than for similar private-sector employees, on average.”
Of all the studies in all the world, I haven’t seen one that states the obvious; whether the claim is that the “average” public employee is overpaid by 30% (Genest), 72% (Heritage), 100% (CPC), 17% (CBO) or 10% (Biggs national average) ; the “average” is driven by the lowest paid public workers, and that is where the cuts have to come from.
Why do you rob banks? Cause that’s where the money is.
Most of these studies are conducted by the higher paid public and private economists.Why aren’t they smart?
*One of scores of conflicting, nearly useless studies in the last decade.
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So what?
This concept, of compressed compensation for public workers, essentially a “floor” for lower paid workers and a ceiling for higher paid, seems to be almost universal, in state, local, and federal workers, and in many OECD countries. Also the trend of paying lower salaries, offset by higher benefits/pensions.
On the plus side, IMHO, it tempers the income inequality, particularly in the U.S. About one out of seven workers are employed by some level of government, so the higher compensation, mostly in pensions and healthcare, at the lower levels, helps to reduce overall inequality.
Oddly, in all the reports and studies I’ve read, I have seen zero indication that this principle was intentional. It seems to have evolved organically, just about everywhere. And I have read about every study or article I could find, mainly because of the fallout of the 2008-2009 financial crisis, about the time I retired.
I don’t think the authors either intended, or even recognized, the irony of:
“Overall, the federal government would have reduced its spending on wages by 3 percent if it had decreased the pay of its less educated employees and increased the pay of its more educated employees to match the wages of their private-sector counterparts.” (p.2)
Or, as Douglas says: “…the “average” is driven by the lowest paid public workers, and that is where the cuts have to come from.”
Why do you rob banks? Cause that’s where the money is.
End of rant.
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I would second that suggestion–makes sense especially financial sense–the unions would have issues, but what can you do about them as they are politically connected especially public sector ones.
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Unions…
From memory, I can’t remember the exact year in the seventies, Jerry Brown vetoed a general 16 percent increase for most California workers. The veto was famously overridden by the legislature.
It was and still is very common for state/local government workers to go two or three years without cost of living raise, then (try) to play catch up. Politics Trump unions.
To catch up with inflation, the unions had actually calculated a 25 percent, or more, increase.
Some occupational groups (including mine; electricians) actually got an additional 5 percent due to comparison studies.
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the servants of the people live quite well while they are serving the folks and have a great retirement program–many of these folks can retire at age 55 with 30-years service–“pensions” that are inflation protected–some states do not tax public pensions–the party of government has done quite well for their constituents.
the only blessing is that the private sector, for the most part, has 401-k plans and they are portable so one can move around at will and the lack of govt.-like pensions is offset in some ways by the plans.
I know someone who has moved from job to job as she is quite competent with her skills–always more money–always stock options–always with a 401-k that goes along with her.
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I can understand retirement at 55 for strenuous jobs like fire, police, etc. but the office worker should be desk bound until the same age as those claiming social security.
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Many safety workers can retire after twenty years (usually at half of salary), but they often get full family medical for life and sometimes other enhancements.New York City, police, fire, and uniformed sanitation workers, can retire with twenty years.
Depending on rank, for many police and fire, half pay would be equal or higher than full pay for me. Many safety workers have mandatory retirement at 55.
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Reading the bit about State and local pensions being underfunded brought to mind Social Security being underfunded. Federal civilian and military pensions can be lumped in as well although they take much smaller bites out of the federal budget so they are much less noticed. So we beat up on the ordinary citizen for not investing heavily in their own pending retirement and then we will turn around and demand more from them to make up the shortfall from all the government programs.
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