Association for Public Policy Analysis & Management

The fiscal stress of the Great Recession brought public employees’ compensation and benefits to the forefront. As states and local government (SLG) revenues fell and public pension plan assets dropped in value, SLGs faced rising pressure to cut benefits, increase employee contributions, raise retirement ages, or reduce cost-of-living adjustments.  Charges that SLG pay and pension benefits were overly generous rose, prompting studies comparing public and private compensation (Munnell et al. 2011, Gittleman and Pierce 2011, Biggs and Richwine 2014).

Critics have long charged that SLGs substitute pension benefits for pay increases as a way to maintain employee support while pushing the costs to future governments (Fitzpatrick 2014, Glaeser and Ponzetto 2014).  Economic theory predicts that, in a perfectly functioning labor market, a one-dollar increase in pension benefits would be offset by a one-dollar decrease in wages, because employees are paid a total compensation equivalent to their marginal product. However, empirical studies have largely been unable to confirm such a relationship, even in the private sector, often finding a positive relationship: better-paying jobs also come with good benefits.

We provide the first test of whether state governments trade off pension benefits for pay.  We combine data from the 2001-2014 American Community Survey (conducted by the U.S. Census) and pension benefit data from the Public Plans Data (PPD – available from the Center for Retirement Research at Boston College). The PPD provides the employer normal cost for each state pension plan – that is, the amount a state government needs to set aside to cover the costs of pension benefits earned during the year. The normal cost captures changes in plan features and the demographics of the plan members, and it is calculated as part of the annual actuarial assessment.  We compute changes in expected earnings for comparable state government employees from year to year, using standard econometric methods from labor economics.  Using state-years as the units of analysis, we then perform panel data analysis to see whether state governments substitute increases in pension benefits for increases in expected pay.

References

Biggs, A. G., & Richwine, J. (2014). Overpaid or underpaid? A state-by-state ranking of public-employee compensation. AEI Economics Working Paper Series.

Fitzpatrick, M. D. (2014). How much are public school teachers willing to pay for their retirement benefits? . NBER Working Paper Series. 

Gittleman, M., & Pierce, B. (2011). Compensation for state and local government workers. Journal of Economic Perspectives, 26(1), 217-242.

Glaeser, E., & Ponzetto, G. A. M. (2014). Shrouded costs of government: The political economy of state and local public pensions. Journal of Public Economics, 116, 89-105.

Munnell, A. H., Aubry, J.-P., Hurwitz, J., & Quinby, L. (2011). Comparing compensation: state-local versus private sector workers. Retrieved from Center for Retirement Research at Boston College