In a long and thoughtful reflection on David Brooks’ bleat about public pensions, Jon admits that there is a public pension problem and maybe even a public employee salary issue. Here’s some more along those lines, too long for a comment. My main point is that the problem is structural: political arrangements, intentional and other, matter.
First, there’s no shame in civil servants demanding outrageous employment terms, whether pay or pensions. That’s how negotiations are supposed to work: the dealer starts with a loaded model at full sticker price, you come in looking for a bargain that will put his kids’ orthodontist on the street, and you make a deal in between. The deal that will staff government at the right price can be a range of combinations of pension and upfront salary; of course if money is shifted from the latter to the former, it has to be more for the workers to be indifferent. But the government side of this negotiation has a short time horizon: pension costs are NIMTOs [Not In My Term of Office] and “wow, I wish I had voted against Mayor Giveawaythestore twenty years ago” butters no parsnips. If the pension is a defined-benefit package, all the investment and actuarial risk is on the government side, and this is getting very technical and hard to put before voters, in fact I’m getting a headache myself. “We can avoid a strike two months before the election at no cost to me? Sign it; next agenda item, please.” Indeed, public sector salaries (corrected for education and experience) seem to be about 4% below private sector pay, but total compensation including benefits is about the same: compensation is shifted toward pensions.
The size of the package itself, counting pay, benefits, and job security, is biased towards being too big because public employee unions are groups with high individual stakes, who know each others’ phone numbers and addresses, who contribute to campaigns and who tend to live and vote in the jurisdiction, while the other side of the table (government service consumers) are often passing through or commuting, are more numerous, and have lots of issues that vary across their membership and are larger for any one of them than the tax hit from the current pay deal. They tend to vote on potholes and current taxes, and have no clue about labor contracts. Mancur Olson explains all this in The Logic of Collective Action, still a classic. When bad times come and the city has to choose between layoffs and salary cuts, the layoffs always win because public employee union members stop being members when they’re laid off: all the angry losers will not vote in the next union election. So salary packages are on a ratchet.
General Motors was in a similar situation vis-a-vis the UAW back in the day when the Big Three divided up the US auto market like gentlemen instead of competing, and when investors were more or less obliged to hold GM stock. It’s stockholders were many and various, none greatly affected by the GM labor contract, and its customers similarly atomized organizationally. Only when Toyota started to eat GM’s lunch was the company unable to set prices unilaterally or to manage the company for the short-term comfort of its managers, and the system began to crumble.
Overall, the ability of governments to keep total pay at what would appear to be the market clearing price (about the same as the private sector) is an accomplishment, pace pathologies like the city of Bell. There remains, however, the possibility that job security is undervalued as an offset to money pay, and that we are still overpaying counting everything, also that starting public pensions when civil servants actually retire rather than when they leave their government jobs would be yessable and would certainly reduce pension costs. The politics and optics of people “retiring” into full employment at 50 are in any case terrible. There also remains the likelihood that specific public enterprises, of which corrections in California is exhibit A, will be too big, especially when the biased negotiating situation described above meets voters’ ignorant impulses. And of course, nothing in this story pushes towards excellent, productive public management.