Government Workers Are Overpaid

One of the many costs to our economy from expanding government into new areas – single-payer health care being one of the biggest – is that worker compensation would be artificially inflated to unsustainable levels.

Not only do government workers make larger paychecks on average than private-sector employees, but they also get vastly more generous benefits packages. Since neither their salaries nor their benefits are subject to the forces of the free market, and since the funding for the compensation of government employees is technically based on coercion – taxes – it is fair to say that their compensation is inflated compared to where the free market would place it.

This, of course, raises a pertinent question regarding the growth of government that we can expect, should the current welfare-state expansion ambitions in Congress bear fruit. If all health-care employees work for government instead of the private sector; if all child-care employees are on government payroll (and all small kids in America are in their care); the cost per worker will rapidly inflate above what the free market would suggest – in short, above what the economy is able to afford.

To get a general idea of just how much government inflates employee compensation, I pulled some numbers from the Bureau of Labor Statistics database. They divide total compensation into: wages and salaries; paid leave, which includes vacation, sick leave, personal leave and other forms of compensated worker absence; insurance, i.e., health and life insurance benefits; retirement savings; workers’ compensation; legally required benefits, mostly Social Security, Medicare and Medicaid; unemployment insurance; and other.

In 2019, the top year of the Trump economy with unemployment dipping below 3.5 percent and workforce participation above 60 percent, the average private worker made $24.26 per hour. The hourly cost of benefits were as follows:

  • Paid leave: $2.50
  • Workers’ comp.: $0.45
  • Insurance: $2.76
  • Retirement: $1.29
  • Legally required benefits: $2.67
  • Unemployment insurance (fed and state): $0.17
  • Other: $1.13

Total worker compensation in 2019 added up to $35.23 per hour.

By contrast, state and local government employees were paid $32.01 per hour in wages and salaries, and:

  • Paid leave: $3.84
  • Workers’ comp.: $0.56
  • Insurance: $6.06
  • Retirement: $6.13
  • Legally required benefits: $2.83
  • Unemployment insurance (fed and state): $0.06
  • Other: $0.51

This adds up to $51.99 per hour.

In other words, the average government worker got a total compensation package worth 48 percent more than what the private-sector employee got. Wages and salaries were 32 percent higher and paid-leave benefits 54 percent higher, but the categories that really stand out are insurance plans and retirement benefits.

Employees in state and local government get on average $2.19 in life and health insurance coverage for every $1.00 that a private-sector employee gets. But the difference gets downright monstrous on the retirement-benefits side: for every $1.00 in private-sector benefits, the government employee gets $4.74.

The disparity in retirement benefits is not a new problem. It has long been a source of fiscal stress for states and local governments. There have been some efforts by legislatures to move government employees from a defined-benefit to a defined-contribution system, but their success has been limited. As of 2018, 83 percent of all state and local government employees were enrolled in a defined-benefit plan and 94 percent had access to one. The proportions are almost exactly the opposite in the private sector, where only 17 percent of all employees even have access to a defined-benefit plan.

Retirement plans that pay out a defined benefit are designed based on the premise that the tax base funding the plan will always grow on part with, or faster than, the benefits themselves. This, however, is never a given; the past 20 years have shown that not even the U.S. economy is immune to the growth-drag effects of the welfare state. We have not seen our GDP expand faster than three percent since 2005, and the prospects for even 2.5 percent per year are increasingly bleak. The tax bases from which states and local governments collect retirement-benefit funding, grow largely on par with GDP, making it increasingly difficult to continue funding defined-benefit plans, especially without tax hikes.

Since higher taxes depress GDP growth, the persistent use of defined-benefit plans cause a slow-moving but inevitable downward spiral for state governments. Their insistence on keeping defined benefits cause a slow erosion of government finances; even if the erosion at times looks glacial in the context of broader trends in government finance, it is still there and the problem is not going away.

To make matters even more problematic for governments around the country: the retirement plans for their employees are an increasing share of their total compensation package: in 2019 those benefits accounted for 11.8 percent of their employee compensation; in 2021 that share had increased to 12.4 percent. By contrast, in 2019 retirement benefits were only 3.75 percent of total compensation for private-sector workers; in 2021 it had fallen to 3.4 percent.

Health insurance benefits are also skewed, again reflecting the distance between government-employee compensation and the free market. While their insurance benefits steadily account for 11.5-11.7 percent of total compensation, that share is less than eight percent in the private sector.

That is not to say employee compensation has been stagnant in the private sector. In fact, in total it has actually outgrown compensation of government workers. Comparing 2021 to the last year before the 2020 artificial economic shutdown,

  • In the first quarter of 2021, total private-employee compensation was 6.07 percent higher than in the first quarter of 2019;
  • In the second quarter, the increase was 6.22 percent.

By contrast, government workers saw their total compensation increase by 5.44 percent in Q1 and 5.51 percent in Q2. However, the compensation increase in the private sector has been concentrated to wages and salaries (up 6.74 and 7.25 percent, respectively) and paid leave (9.68 and 9.31 percent). These are compensation forms with lower long-term contractual obligations, making it easier for employees to adjust them with the ebbs and flows of the free market.

Since government is formally impervious to free-market business cycles, it has increased the contractually rigid parts of employee compensation more than other parts: retirement benefits are up 12 percent so far in 2021 over the same period 2019.

Government workers are already compensated lavishly compared to workers in the sector that funds government. An expansion of government, such as but not limited to a full socialization of our health-care system, will come with major cost problems, one of which will be the cost of employee compensation.