The Future of Public Employee Retirement Systems

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1 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) iii of 343 July 21, :23 The Future of Publi Employee Retirement Systems EDITED BY Olivia S. Mithell and Gary Anderson 1

2 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) iv of 343 July 22, :33 3 Great Clarendon Street, Oxford ox2 6dp Oxford University Press is a department of the University of Oxford. It furthers the University s objetive of exellene in researh, sholarship, and eduation by publishing worldwide in Oxford New York Aukland Cape Town Dar es Salaam Hong Kong Karahi Kuala Lumpur Madrid Melbourne Mexio City Nairobi New Delhi Shanghai Taipei Toronto With offies in Argentina Austria Brazil Chile Czeh Republi Frane Greee Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trade mark of Oxford University Press in the UK and in ertain other ountries Published in the United States by Oxford University Press In., New York Pension Researh Counil, The Wharton Shool, University of Pennsylvania, 2009 The moral rights of the authors have been asserted Database right Oxford University Press (maker) First published 2009 All rights reserved. No part of this publiation may be reprodued, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographis rights organization. Enquiries onerning reprodution outside the sope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not irulate this book in any other binding or over and you must impose the same ondition on any aquirer British Library Cataloguing in Publiation Data Data available Library of Congress Cataloging in Publiation Data Data available Typeset by SPI Publisher Servies, Pondiherry, India Printed in Great Britain on aid-free paper by MPG Books Group, Bodmin and King s Lynn ISBN

3 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) 85 of 343 July 21, :23 Chapter 6 Benefit Cost Comparisons Between State and Loal Governments and Private Industry Employers Ken MDonnell It is often argued that ompensation patterns for publi setor employees are higher than in the private setor. This hapter examines some of the reasons for the observed differenes in total ompensation osts between US state and loal government employers and private industry employers. We examine ompensation osts by industry, oupation, union status, and employee benefit partiipation. The evidene seems to be broadly supportive of the general point. For instane, overall total ompensation osts were 51.4 perent higher among state and loal government employers ($39.50 per hour worked in 2007) than among private industry employers ($26.09 per hour worked in 2007); see Tables 6-1 and 6-2. Total ompensation osts onsist of two major ategories: wages and salaries, and employee benefits. For both of these ategories, state and loal government employer osts were higher than those of private industry employers: 42.6 perent higher for wages and salaries, and 72.8 perent higher for employee benefits. Changes over time Partiipation Rates. From 1998 to 2007 there was very little hange in partiipation rates among full-time employees in state and loal governments. In 1998, 86 perent of full-time employees partiipated in health insurane. By 2007, this perentage had delined but only slightly to 82 perent; see Table 6-2. For other insurane benefits suh as life and disability, partiipation rates inreased in a range of 2 to 5 perentage points. Partiipation among full-time employees in retirement/savings plans showed little hange from 98 perent in 1998 to 95 perent in Partiipation inreased for full-time employees in defined ontribution (DC) plans from 14 perent in 1998 to 21 perent in 2007 while it delined but only slightly in defined benefit (DB) plans, from 90 perent in 1998 to 88 perent in

4 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) 86 of 343 July 21, :23 Table 6-1 Employer osts for employee ompensation a and perentage of full-time employees partiipating b in employee benefit programs: state and loal governments: 1998 and 2007 Employee Benefit Program b Total % of Total % Total % of Total % Compensation Compensation Partiipation Compensation Compensation Partiipation Costs ($/hour) Costs Costs ($/hour) Costs Total ompensation osts Wages and salaries Total benefits Paid leave Vaations Holidays Sik Other Supplemental pay Overtime and premium d Shift differentials Nonprodution bonuses Insurane Life Health Short-term disability Long-term disability

5 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) 87 of 343 July 21, :23 Retirement and savings Defined benefit Defined ontribution Legally required benefits Soial Seurity and Mediare OASDI e Mediare Federal unemployment f g f g insurane State unemployment insurane Workers ompensation Notes: Beause of rounding, sums of individual items may not equal totals. a Data are representative of all employees and inludes all employers whether the employer offers a type of benefit or not. b Inludes workers overed but not yet partiipating due to minimum servie requirements. Does not inlude workers offered but not eleting ontributory benefits. Data not available. d Inludes premium pay for work in addition to the regular work shedule (suh as overtime, weekends, and holidays). e Stands for Old-Age, Survivors, and Disability Insurane. f Cost per hour worked is $0.01 or less. g Less than 0.05 perent. Soure: US Department of Labor (1998, 2007a, 2000, 2008).

6 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) 88 of 343 July 21, :23 Table 6-2 Employer osts for employee ompensation a and perentage of full-time employees partiipating b in employee benefit programs: private industry Employee Benefit Program b Total % of Total % Total % of Total % Compensation Compensation Partiipation Compensation Compensation Partiipation Costs ($/hour) Costs (1996/97) Costs Costs (2007) (1997) (1997) ($/hour) (2007) (2007) Total ompensation osts Wages and salaries Total benefits Paid leave Vaations Holidays Sik Other Supplemental pay Overtime and premium d Shift differentials Nonprodution bonuses Insurane Life Health Short-term disability Long-term disability Retirement and savings Defined benefit Defined ontribution

7 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) 89 of 343 July 21, :23 Legally required benefits Soial Seurity and Mediare OASDI e Mediare Federal unemployment insurane State unemployment insurane Workers ompensation Notes: Beause of rounding, sums of individual items may not equal totals. a Data representative of all employees and inludes all employers whether the employer offers a type of benefit or not. b Inludes workers overed but not yet partiipating due to minimum servie requirements. Does not inlude workers offered but not eleting ontributory benefits. Data not available. d Inludes premium pay for work in addition to the regular work shedule (suh as overtime, weekends, and holidays). e Stands for Old-Age, Survivors, and Disability Insurane. f Cost per hour worked is $0.01 or less. g Less than 0.05 perent. Soure: US Department of Labor (1997, 2007a, 1999a, 1999b, 2007).

8 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) 90 of 343 July 21, :23 90 Ken MDonnell For leave benefits, there was a modest inrease in partiipation rates in the range of 1 to 3 perent. Partiipation rates among full-time employees in private industry showed an inrease in leave benefits, partiularly in paid sik leave plans whih inreased from 53 perent of full-time employees in 1996/97 to 68 perent by 2007; see Table Partiipation in health insurane delined from 70 perent in 1996/97 to 64 perent in 2007 and in life insurane from 74 perent to 69 perent. For disability insurane, both short-term and longterm, partiipation rates inreased in a range of 3 to 5 perent. Among retirement/savings plan partiipation the overall perentage hange was slight, from 62 perent in 1996/97 to 60 perent in 2007, yet the partiipation rate hange by plan type was signifiant, partiularly in DB plans whih experiened a deline of 9 perentage points from 32 perent in 1996/97 to 23 perent in Benefit Costs. For both state and loal governments and private industry, benefit osts inreased as a perentage of total ompensation with the perentage inrease for state and loal governments greater. From Marh 1998 through September 2007 benefit osts, as a perentage of total ompensation among state and loal governments, inreased from 29.7 perent to 33.5 perent while in private industry benefit osts inreased from 27.5 perent to 29.4 perent (from Marh 1997 through September 2007; see Tables 6-1 and 6-2). For both employer types, the main driver in benefit ost inreases was health benefits. For state and loal governments, health benefits inreased from 7.5 perent of total ompensation to 11.0 perent, from Marh 1998 through September 2007 while for private industry health benefits inreased from 5.5 perent of total ompensation to 7.1 perent from Marh 1997 through September Work fore omparisons A primary explanation for differenes in total ompensation osts between state and loal government employers and private industry employers is that of their respetive work fores differenes in ompensation. This is evident from a omparison of data arrayed by industry and oupation group. 2 Industry Groups. State and loal government workers are highly onentrated in the eduation setor. This grouping inludes teahers and university professors, two ategories of employees with high unionization rates and high ompensation osts. Table 6-3 shows that 52.7 perent of all state and loal government employees were employed in this setor, in 2007, and total ompensation osts for the eduation setor were $42.48 per hour worked. By ontrast, the private industry group with the largest

9 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) 91 of 343 July 21, :23 Table 6-3 Employment and total ompensation osts, by industry group and union membership, state and loal governments and private setor: 2007 State and Loal Government Private Setor Employment Total Compensation Employment Total Compensation Costs ($/hours) Costs ($/hours) Total million Total million Eduation 52.7% Constrution 6.7% Hospitals Manufaturing General administration Trade, transportation, and utilities Loal government 1.2 a Information utilities Finanial ativities Loal government 1.3 a Servies transportation Professional and Other 8.2 a business servies Eduation and health servies Leisure and hospitality servies Other servies Members of a 36.2% Members of a Union b 7.4% Union b Non-Union Workers b Non-Union Workers b a Data not available. b Data for Soures : Department of Labor (2007a, 2007b), U.S. Department of Commere (2008), and unpublished data from the U.S. Department of Labor.

10 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) 92 of 343 July 21, :23 92 Ken MDonnell number of workers was servies, aounting for 47.9 perent of all privatesetor workers. Here total ompensation osts for servies were $24.91 per hour worked. Another fator affeting total ompensation osts is union membership. Union presene in an industry tends to be positively orrelated with total ompensation osts and benefit partiipation. Table 6-3 shows that 7.4 perent of private industry workers were members of a union in 2006, ompared with 36.2 perent of workers in state and loal governments. Among private industry employers total ompensation osts for unionized workers were $35.92 per hour worked ompared with $24.94 per hour worked for non-unionized workers in Oupation Groups. The onentration of oupations among state and loal government employers is also quite different from private industry employers. Table 6-4 shows that a large perentage of state and loal government employees in 2007 were onentrated in teahers (27.0%) and in servie oupations (31.8%). Teahers had the highest total ompensation osts among state and loal government employers, $53.39 per hour in By omparison, the largest perentage of private industry workers was among sales and offie oupations (27.3%) and servie oupations (25.7%) where ompensation osts were low, $20.86 per hour worked for sales and offie and $13.00 per hour worked for servie workers. The largest gap in ompensation osts between state and loal government and private industry workers was among servie oupations. The total ompensation osts for these workers in state and loal governments were $30.74 per hour in 2007 ompared with $13.00 per hour in the private setor. This differene is due primarily to the type of oupations in the servies ategory. Among state and loal governments, the US Department of Labor Bureau of Labor Statistis (BLS) ategorizes polie and firefighters among the servie oupations. Polie and firefighters have a high partiipation rate in a DB plan. Among private industry employers, oupations suh as waiters/waitresses and leaning and building servies funtions are ategorized as servie oupations, and these jobs traditionally have low wages. Publi Private differenes in employee benefit osts As noted earlier, benefit osts of state and loal government employers were 72.8 perent higher than those of private industry employers in Next we review fators ontributing to this differene. Benefit Costs. The two most important voluntary benefit programs provided by employers are health insurane and a retirement/savings plan. Important ost disparities exist for these two benefits omparing state and

11 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) 93 of 343 July 21, :23 6 / Benefit Cost Comparisons 93 Table 6-4 Employment and total ompensation osts in state and loal governments and private setor by oupation group, ages 16 and older State and Loal Governments Private Setor Employment (2006) Total Employment Total Compensation (2006) Compensation Costs Costs ($/hour) ($/hour) (2007) (2007) Total million million Management, 13.4% % professional and related Professional and related Teahers a Sales and offie Servie Natural resoures, onstrution, and maintenane Prodution, transportation, and material moving a Inludes postseondary teahers; primary, seondary, and speial eduation teahers, and other teahers and instrutors. Soures: Author s tabulations from the Current Population Survey Marh 2007 Supplement, EBRI (2007) and unpublished data from the U.S. Department of Labor. loal government employers, and private industry employers. Tables 6-1 and 6-2 indiate the average ost for health insurane benefits for state and loal government employers was $4.35 per hour, ompared with $1.85 per hour for private industry employers, a differene of 235 perent. The differene is even larger for retirement/savings plans, whih benefits ost state and loal government employers $3.04 per hour worked versus $0.92 per hour worked for private-setor employers, a differene of 330 perent. One reason for this divergene is that DB retirement plans are more prevalent among state and loal governments than they are in private industry.

12 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) 94 of 343 July 21, :23 94 Ken MDonnell Partiipation. Another reason for the observed differene in benefit osts is that state and loal government employees are more likely to partiipate in employee benefit programs than are their private industry ounterparts. Health insurane partiipation rates among full-time employees in state and loal governments were signifiantly higher than rates among full-time employees in private industry as is depited in Tables 6-1 and 6-2. The disparity is larger for retirement and savings plans. Virtually all fulltime employees in state and loal governments partiipated in some type of retirement/savings plan, versus about 60 perent of full-time employees in private industry. Further, the majority of publi setor workers have a DB plan and these DB plans tend to be more expensive to provide than DC plans. The administrative burdens and osts of operating DB plans is often ited by orporate plan sponsors as a major disinentive to operating this type of retirement plan (VanDerhei and Copeland 2001). Conlusion Observed differenes in ompensation osts between publi and privatesetor employers are summarized. One explanation for these differenes distintions has to do with the different onentrations of workers by industry and oupation. Another relates to the omposition of the benefit pakage and benefit partiipation rates. State and loal government retirement and health insurane osts are two to three times those of private employers. Data Appendix The datasets used in this study inlude the following: For ompensation osts: US Department of Labor (DOL) (1997). Employer Costs for Employee Compensation-Marh Washington, DC: Bureau of Labor Statistis; US Department of Labor(DOL) (1998). Employer Costs for Employee Compensation-Marh Washington, DC: Bureau of Labor Statistis; and US Department of Labor (DOL) (2007a). Employer Costs for Employee Compensation-September Washington, DC: Bureau of Labor Statistis. For benefit partiipation private industry: US Department of Labor (DOL) (1999a). Employee Benefits in Medium and Large Private Establishments, Washington, DC: Bureau of Labor Statistis; US Department of Labor (DOL) (1999b). Employee Benefits in Small Private Establishments, Washington, DC: Bureau of Labor Statistis; and US Department of Labor (DOL) (2007). National Compensation Survey: Employee Benefits in Private

13 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) 95 of 343 July 21, :23 6 / Benefit Cost Comparisons 95 Industry in the United States, Marh Washington, DC: Bureau of Labor Statistis. For benefit partiipation state and loal governments: US Department of Labor (DOL) (2000). Employee Benefits in State and Loal Governments, Washington, DC: Bureau of Labor Statistis; and US Department of Labor (DOL) (2008). National Compensation Survey: Employee Benefits in State and Loal Governments in the United States, September Washington, DC: Bureau of Labor Statistis. For employment by industry: US Department of Labor (DOL) (2007b). Employment and Earnings, Deember 2007, 54(12). Washington, DC: Bureau of Labor Statistis. For employment by oupation: Employee Benefit Researh Institute (EBRI) (2007). EBRI Estimates from the Current Population Survey, Marh 2007 Supplement. Washington, DC: Employee Benefit Researh Institute. Notes 1 To obtain an aurate omparison of benefit partiipation among full-time employees in private industry, the author ombined data from the BLS Survey on Small Private Establishments with the BLS Survey on Medium and Large Private Establishments. This made the omparison with the 2007 data more aurate beause the 2007 is representative of small, medium, and large private establishments. Data in the 2007 Bulletin are reported for full-time employees but not for full-time employees by firm size. 2 Readers should be aware that the term servie is not used in the same way for the industry groupings and oupation groupings: that is, not all servie workers are employed in the servie industries. Referenes Employee Benefit Researh Institute (EBRI) (2007). EBRI Estimates from the Current Population Survey, Marh 2007 Supplement. Washington, DC: Employee Benefit Researh Institute. US Department of Commere (2008). Statistial Abstrat of the United States, Bureau of the Census. Washington, DC: US Government Printing Offie. US Department of Labor (DOL) (1997). Employer Costs for Employee Compensation- Marh Washington, DC: Bureau of Labor Statistis. (1998). Employer Costs for Employee Compensation-Marh Washington, DC: Bureau of Labor Statistis. (1999a). Employee Benefits in Medium and Large Private Establishments, Washington, DC: Bureau of Labor Statistis. (1999b). Employee Benefits in Small Private Establishments, Washington, DC: Bureau of Labor Statistis.

14 Mithell-Main-drv Mithell (Typeset by SPi, Chennai) 96 of 343 July 21, :23 96 Ken MDonnell US Department of Labor (DOL) (2000). Employee Benefits in State and Loal Governments, Washington, DC: Bureau of Labor Statistis. (2007a). Employer Costs for Employee Compensation-September Washington, DC: Bureau of Labor Statistis. (2007b). Employment and Earnings, Deember 2007, 54(12). Washington, DC: Bureau of Labor Statistis. (2007). National Compensation Survey: Employee Benefits in Private Industry in the United States, Marh Washington, DC: Bureau of Labor Statistis. (2008). National Compensation Survey: Employee Benefits in State and Loal Governments in the United States, September Washington, DC: Bureau of Labor Statistis. VanDerhei, Jak and Craig Copeland (2001). The Changing Fae of Private Retirement Plans. EBRI Issue Brief no Washington, DC: Employee Benefit Researh Institute.

The Future of Public Employee Retirement Systems

978 0 19 957334 9 Mitchell-Main-drv Mitchell (Typeset by SPi, Chennai) iii of 343 July 21, 2009 20:23 The Future of Public Employee Retirement Systems EDITED BY Olivia S. Mitchell and Gary Anderson 1 978