With all the calls for cutting government spending, much attention is being focused on how much government employees are being paid and on promises that have been made about pensions and retiree health care.
This is relevant for me because as of Oct. 1, I am a government pensioner. With three years of active duty and another 24 years in the Army Reserve, I qualified at age 60 for 17.4 percent of the pay of an Army major. That comes to $1,208 a month, adjusted upward each year with the Consumer Price Index. And because I am willing to forgo $81.77 of that each month, my wife, who is 10 years younger, will continue to get $664 each month that she survives me. So I’ll have $37 of walking-around money every day for the rest of my life. Pretty cushy deal, isn’t it?
J. Peter Grace thought it was. The corporate executive headed a commission appointed by President Ronald Reagan to seek out waste in government spending. One key finding was the military retirement system provided “six times the benefits of the best private sector plans.” Grace trumpeted that cutting these benefits could save an amount equal to the income taxes paid by 10 million households making the median income.
The problem with his reasoning was he assumed that just as many people would be willing to serve in the military even if the value of promised pensions were cut by more than 80 percent.
Even the barely literate re-enlistment noncommissioned officer at Landing Zone English in Vietnam who tried to get me to re-up at the end of my active duty tour knew that expected pension benefits influenced decisions to stay in the military. He pointed out repeatedly that having enlisted days after my 17th birthday, I could retire on 50 percent pay at age 37. “Jeez, you’ll have it made in the shade,” he said.
I understood the promised value, but I had been in the tropics for two years, had jungle rot and was eager to leave Vietnam for the hallowed halls of the University of Minnesota. So I got out.
But by the time the Grace Commission issued its report, I was back in as a reserve first lieutenant. No reserve unit I had served in up to that time ever had been above 80 percent strength. That says something about the adequacy of military compensation.
Two weeks into any semester, my microeconomics students can tell you that an employer who offers jobs to the public, but cannot fill them, is not paying enough in one form or another. It is simple supply and demand.
A recent story about retiring St. Paul police officers noted that decades ago, each opening on the force had nearly 90 applicants. To an economist, that shows compensation levels were, indeed, higher than necessary.
But such an excess of applicants is not the rule in all government hiring. Some school districts, largely in the Twin Cities metro area, often have dozens of candidates for each opening. In small towns, qualified applicants often are scarce. Similar disparities can be seen at county hospitals across Minnesota. So while some broad-brush studies conclude that compensation for government jobs averages 25 percent or more above comparable private-sector positions, on the ground conditions vary greatly.
This is not to defend current compensation structures. Almost certainly, pensions make up a higher proportion of total public employee compensation than is economically efficient. The situation is made worse because politicians can camouflage true levels of current spending on personnel by over-weighting pensions.
Unfunded public pension liabilities and the excessive political power of public sector employee unions in many jurisdictions are real problems. They have been waiting in the wings for decades, while a few fiscal Paul Reveres tried in vain to raise the alarm. Such problems will quickly become more acute in the next few years. So change is needed.
But we should not make the Grace Commission error of assuming that one can cut deferred compensation without affecting the overall attractiveness of government employment. It may be possible to cut total compensation for many agencies and still fill positions. But that has not been true for the armed services over most of the past 40 years and is not true now.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.