Frederick A. Costello
September 27, 2010
Introduction: Public interest has been building in reducing Fairfax County expenditures, especially regarding its pension benefits for employees. The County has a defined-benefit program, the ERFC, whereas the private sector has defined-contribution plans. The purpose of this report is to compare the total remuneration of County employees to the total remuneration of their counterpart private-sector employees.
Summary: County salaries are nearly the same as private-sector salaries, the County salaries being higher for the lower-ranking jobs and approximately 4% lower for high-ranking jobs. The pension benefits are considerably greater for the County employee than for the private-sector employee; therefore, the total remuneration is higher for County employees than for private-sector employees. In particular, if the pension is spread over the years worked, a County engineer receives 44.2% more than his salary; the private-sector engineer, 5.0%. County workers probably also receive more health-care benefits than private-sector employees. Health-care benefits for state and local government workers throughout the U.S. average 24.0% of wages; for private-sector employees, 11.5%.
If the County health-care benefits equal the national and these benefits are added to the County pension benefits, the remuneration for County employees is 47.7% higher than for their counterparts in the private sector.
The effect of the higher remuneration is most evident in the pension amounts. After 30 years of work, the private-sector engineer would retire with a pension of $4,698 per year; the County engineer, $86,305 per year. Because the County’s pension is based on the average total salary over the last three years of work, by working much overtime in his last three years, the County engineer can increase his pension.
Data for non-engineering workers leads to the same conclusions, at least approximately, as those for engineers.
To compare County salaries to private-sector salaries, we chose to look at engineers in particular, then look at employees in other disciplines on an average basis. The County has four classes of engineers, although it has no employees in the job classification of Engineer I. We extracted the information on the FY2006 salaries of the County’s 195 engineers from a list that shows the name, title, and salary for each of 11,924 County non-school employees. The salary distribution of the engineers is shown in the following chart. The job description of an Engineer III requires a bachelor’s degree in engineering, four years of experience, and a professional engineering license. An Engineer IV has the same requirements but one more year of experience and experience in the administering one a large project ($75M). We assume that a private-sector engineer with 30 years of experience would have the qualifications of an Engineer IV. We assume that most County engineers are civil engineers, because most of the work involves civil engineering (buildings, sewer and water, etc.); therefore, we made the salary comparisons for civil engineers.
To continue our analysis, we consider only the highest performers, one engineer working for the County and his counterpart working in private industry. We under-estimate the differences between the two by assuming a low starting salary for the County engineer, $52,000 instead of $54,000, and a high starting salary for the private-sector engineer, $52,000 instead of $48,000. The County engineer gets year-to-year raises such that he earns $102,000 after 30 years and retires at age 55. The private-sector engineer earns $106,000 after 30 years, but with his salary increasing only by the amount of inflation thereafter, until he retires at age 67. Both are assumed to live until age 83. Under these assumptions and an assumed return on investment 2% above inflation, the net present value of the salary of the County engineer after 30 years is $1,677,967; of the private-sector engineer after 30 years, $1,711,130. The private-sector engineer has received an average of 2.0% more than the County engineer.
The two engineers will also have different retirement plans. The County engineer has a defined-benefit plan by which he receives 1.8% of his average salary over the last three years, per year worked. He worked 30 years, so he receives 30*1.8% = 54% as his base pension. According to the pension plan, this amount is adjusted upward 3%, so his pension is 55.62%. He receives an additional 1.0%*30*1.03 = 30.9% until he receives Social Security. When Social Security starts, this last amount is no longer paid. The County engineer pays 4% of his salary as his contribution to his pension.
If we assume that the percent salary increase is the same each year, the average salary of the County engineer over the last three years is $99,752. The retirement “nest egg” that the County engineer has after his 30 years of work, age 55, is $1,506,691 in 2006 dollars. (Using 2006 dollars makes the computations and comparisons independent of inflation.)
The private-sector engineer has a defined-contribution plan to which he contributes 5% of his salary that his employer matches with a 5% contribution. At age 67, his retirement “nest egg” is $535,257 in 2006 dollars, despite the fact that he has worked 12 more years than does the County engineer, has contributed more to his own retirement, and receives his nest egg 12 years later than his County counterpart.
The private-sector engineer must work an extra 12 years because he cannot afford to retire at age 55. Whereas the income to the County engineer at retirement at age 55 is $86,305 in 2006 dollars, the private-sector engineer must plan to live until age 83; therefore, he can draw only $4,698 per year from the retirement funds he has accumulated by age 55. At age 67, the private-sector engineer would receive an additional approximately $30,000 from Social Security so his income would rise to $34,698. The County engineer would receive this same amount from Social Security but would have his pension payment decrease by the same $30,000 amount; therefore, his retirement income would remain at $86,305.
The value of the two retirements is better compared on a net-present-value (NPV) basis. The NPV is the amount of money that the engineer would need in hand today (i.e., on the day he starts to work at age 25) to have the nest eggs given in the previous paragraphs, with the amount in hand today being invested in an account that earns 2% more than inflation. The NPV of the County engineer nest egg is $831,800; of the private-sector engineer, $232,999, or 28% that of the County engineer.
If we spread the retirement nest eggs over the years worked, we arrive at a figure that is equivalent to paying the engineer that much more money each year instead of giving him a pension. If we make the addition to the engineer’s salary as a constant percentage of his annual salary, we find that the County would pay a 44.2% higher salary. The private-sector employer would pay a 5.0% higher salary. For example, in the first year of employment, the County would pay $74, 984 (=$52,000*1.442); the private sector employer, $54,600 (=$52000*1.05). In the last year of employment, the County would pay $147,084 instead of a salary of $102,000; the private-sector employer, $111,300 instead of $106,000.
In the last table in the body of this report we show that for the private-sector, the non-pension benefits amount to 35.2% (=11.5%+23.7%) of salary. When combined with the 5% employer contribution, to ratio of total remuneration to salary is 1.40. For the County employee, the same table shows that the non-pension benefits amount to 50.7% (=24.0%+26.7%). When combined with the 44.2% pension, the ratio of total remuneration to salary for the County employee is 1.95. A study by the U.S. Bureau of Economic Analysis shows that the ratio of total remuneration to wages is 1.51 for employees of the Federal government (see Appendix B). The U.S. Bureau of Labor Statistics reports the ratio to be 1.41 for Federal employees, but also reports that the ratio is 1.62 for state and local governments nationally and 1.39 for private-sector employees nationally. BLS’ 1.62 is lower than our 1.95 because the 1.62 includes defined-contribution plans.
We can next examine the salaries of non-engineers. The following table is based on U.S. Bureau of Labor Statistics (BLS) job classifications, which may differ from County classifications. Our best estimate of the County classification is shown in the table. Notice for example, the health-care area. The BLS distinguishes between types of health-care employees. This difference is difficult to identify on the basis of County job titles. If the two classifications are averaged, County and BLS health-care salaries are nearly the same.
Many other inaccuracies are introduced by use of such grossly aggregated data. Within any given job classification, the County workforce may not have the same distribution of inexperienced and experienced personnel as does the metropolitan Washington area as a whole. Some jobs may be part-time and others full-time. The distribution of capabilities may differ. For example, the County may use many more paralegals than does the metro area. All things considered, the County wages seem to be nearly the same as private-sector wages. The most accurate comparison would entail a person who has switched between County and non-County jobs. The least accurate would use comparisons between the entire workforce. The above job-based comparison falls closer to the least accurate than the most accurate.
Because the salaries are nearly the same for any given job classification, we can expect the far more accurate comparison made on the basis of engineers to approximate the comparisons for the other occupations.
Although we have considered above only the pension benefit, the other benefits for state and local-government workers, taken at the national scale, are also greater than for the private sector, as shown in the following table, taken from ftp://ftp.bls.gov/pub/special.requests/ocwc/ect/ececqrtn.pdf.
According to this chart, the State and Local Government Workers retirement and savings benefit is only three times that of the private sector. The difference is less than we found in comparing engineers in part because many state and local government workers have defined-contribution plans, especially in saving accounts.
Our study is certainly not the first concerning the remuneration of public employees. We found no other studies that were as sharply focused as was ours on engineers, although the work of Belman and Haywood comes close (Appendix A). The Belman and Haywood report states that there is almost no difference between private-sector salaries and county salaries, as compared to our 4% estimate. Other investigators used highly aggregated data, which, as we discussed above, leads to aberrations. Bender and Haywood (Appendix A) show a smaller pension effect than we show because their aggregated data includes defined-contribution plans for government workers.
Schmitt (Appendix A) found the same trend that we found: low-wage workers are paid more in government than those in the private sector whereas the opposite was found for high-wage workers. At the high-wage end, we found that County engineers earned 4% less the private-sector engineers; Schmitt, 11%. The 11% would not significantly alter the conclusions of our report.
A recent analysis of Federal pay and benefits shows the total remuneration of Federal employees to be twice that of private-sector employees (Appendix B).
Appendix A: Results of Other Studies
The following two studies are from organizations that favor public employment. Wages may differ by a few percent – so little that the differences can be due to the fact that no two people are exactly the same and have managers who are exactly the same so that salaries of people with similar qualifications will differ.
Belman, Dale and John Heywood: The Truth About Public Employees: Underpaid or
Overpaid? Washington, DC: Economic Policy Institute (1993)
A regression model was developed that included many factors (e.g., education, years of experience, etc.) that influence wages. The period covered is 1973-1989, well after the period when teachers were underpaid. The conclusion is: “this paper shows that after controlling for individual and firm differences, the wages of public and private workers are roughly comparable.”
John Schmitt: The Wage Penalty for State and Local Government Employees. Washington, D.C.: Center for Economic and Policy Research (May 2010)
This report does not indicate whether a regression analysis was used; however, as the Executive Summary indicates, public-sector salaries were compared against private-sector salaries for people with the same age and education. The 1993 work by Belman and Heywood, which used more factors, should have a better matching between public-sector and private-sector employees and, therefore, a more accurate comparison.
The Executive Summary of this report by Schmitt states:
When state and local government employees are compared to private-sector workers with similar characteristics – particularly when workers are matched by age and education – state and local workers actually earn 4 percent less, on average, than their private-sector counterparts. For women workers, the public-sector penalty is about 2 percent of earnings; for men, it is about 6 percent of earnings.
The wage penalty for working in the state-and-local sector is particularly large for higher-wage workers. While low-wage workers receive a small wage premium in state-and-local jobs (about 6 percent for a typical low-wage worker), the typical middle-wage worker earns about 4 percent less in state-and-local work, and the typical high-wage worker makes about 11 percent less than a similar private-sector worker.
The “4 percent less” agrees with our analysis of the engineering salaries.
Most recently, Professors Keith A. Bender and John S. Heywood, under the joint sponsorship of the Center for State and Local Government Excellence and the National Institute on Retirement Security, performed a more extensive comparison between local (e.g., county) and private-industry compensation. The data was obtained from the National Bureau of Economic Research (NBER) (www.nber.org/cps). Except for four major cities, Washington, DC, not being one of them, most of the analysis embraced the entire nation and all workers, without distinction of the jobs held; therefore, for example, salaries for entry-level employees were averaged with entrepreneurs and the presidents of large corporations. The resultant statistic, that local-government workers are paid approximately 10% less than private-sector employees, is the most quoted. Using such aggregated data does not compare the salary of an employee in a particular job with the government and what his salary might be if he worked in private industry instead.
A valid comparison must consider a given job in the government with the same job in private industry. In Appendix A, Figure A1, Bender and Heywood did provide one comparison with “Occupational Controls”. This comparison showed that, in 2008, the local-government employee was paid 4% less than the private-sector employee, with the difference being 4.4% as averaged over the last nine years. The state-government employee was paid 6.5% less than the private-sector employee. This national average of 4% is in good agreement with what we found for Fairfax County.
Because the NBER data does not include benefits, Bender and Heywood obtained the benefits data from the Bureau of Labor Statistics (ftp://ftp.bls.gov/pub/special.requests/ocwc/ect/ececqrtn.pdf), which compiles the data separately for Federal civilian employees, state and local-government employees, and private-sector employees. This BLS data suffers from the same aggregation shortcomings as mentioned above, but the authors found no more specific data. Table 5 of the reference shows:
Table 4 (p. 15) presents the relevant shares for two private sector samples and for the combination of state and local government. The total private firm sample has earnings that are approximately 71 percent of total compensation, while the large-firm private sector sample has an earnings share of 69 percent and the state and local sample has an earnings share of about 67 percent. These shares make clear that benefits are a slightly larger share of compensation in state and local government, although not dramatically different, particularly when compared to larger private sector firms.
The authors’ dismissal of the difference is unjustified. The large-firm private sector as an aggregate is not comparable to government workers. To obtain these percentages, they consider all workers, rather than office workers. They must also reach back to 2006 to obtain the 67% figure. The figure is lower in more recent years.
Consider now a job in which the private-sector employee earns $100,000. With benefits, he earns $100,000/71.9%, or $139,100. For the corresponding job in local government, the salary would be 4% less, or $96,000. With benefits, it would be $96,000/61.6%, or $155,800. The total compensation for the government job is 12% more than for the private-sector job. This amount differs from the 40% we report (1.95/1.39) for the engineer-specific data and without the aberrations associated with the aggregated table above.
Our analysis for Fairfax County is more specific. A large portion of the benefit is the pension, both nationally and for our county. The national data includes some defined-benefit and some defined-contribution plans for the county workers. Fairfax has only a defined-benefit plan, which is more lucrative than most defined-contribution plans. Therefore, our analysis is in good agreement with the Bender and Heywood analysis, when the generalizations of their analysis are considered.
Appendix B: Results of a Study of Federal Salaries and Benefits
A study that shows that Federal salaries are significantly greater than private-sector salaries can be found at: http://www.heritage.org/research/reports/2010/07/inflated%20federal%20pay%20how%20americans%20are%20overtaxed%20to%20overpay%20the%20civil%20service
The Bureau of Economic Analysis has released its annual data on compensation levels by industry. The data show that the pay advantage enjoyed by federal civilian workers over private-sector workers continues to expand. This state of affairs is a thumb in the eye of the private sector, which continues to struggle with high unemployment. Many private sector employees have been forced to take pay and benefit cuts while continuing to fund generous federal employee compensation with their taxes.
Figure 1 looks at average wages. In 2009, the average wage for 1.95 million federal civilian workers was $81,258, which compared to an average $50,462 for the nation’s 101 million private sector workers (measured in full-time equivalents). The figure shows that the federal pay advantage (the gap between the lines) continued its steady increase over the past decade.
The disparity between average federal and private employee compensation has risen dramatically over the decade: from 66 percent in 2000 to 101 percent in 2009. Defenders of generous federal employee compensation point to the higher levels of education in the federal workforce. However, it’s doubtful that education accounts for the growing disparity between federal and private compensation.
Figure 3 shows that federal employees also enjoy much greater job security (data is from Table 18 here). In 2009, a private sector employee was more than three times more likely to be laid off or fired than a federal employee.
data is from Table 16 here). This indicates that federal employees recognize that the generous combination of wages, benefits, and job security is hard to match in the private sector, so they stay put.
 The data was obtained by The Examiner newspapers via a Freedom of Information Act request.
 http://www.payscale.com/mypayscale.aspx?pid=79410be9-bfa6-45be-a351-75e267c686b9, gives the salaries in 2010. These were reduced 10.7% to account for inflation based on the CPI-U index.
 The “nest egg” is the lump sum amount that, on the day of retirement, the retiree would have from which to draw income over his retirement years, until death at age 83. For a defined benefit plan, the “nest egg” equals the value of the payments that the retiree will receive until death at age 83, discounted at a 2% rate.
 Available from the National Institute on Retirement Security at http://www.nirsonline.org/storage/nirs/documents/final_out_of_balance_report_april_2010.pdf
 The data show that the ratio of total compensation to wages is 123,049/81,258 = 1.514 for Federal civilians and 61,051/50,462 for private industry.