Seven deadly lies about public-sector workers

March 10, 2011

Petrino DiLeo counters the myths about greedy government workers with the facts.

BY NOW, we've heard the talking points spouted countless times. There's a new bunch of greedy haves in America who live the good life at the expense of the rest of us, taking unfair advantage of their political connections to loot the public treasury.

Only according to these claims, it's not the bankers who benefited from trillions of dollars committed by the U.S. government to Wall Street bailout, only to turn around and pay themselves billions in bonuses. Instead, the new "haves" are public-sector workers--and the "have-nots" are those in the private sector, and anyone who pays taxes.

Turn on Fox News at any hour of the day, and you're likely to hear well-paid pundits in designer suits railing about the greed of teachers, sanitation workers, social workers, firefighters, bus drivers and every other kind of government worker.

These public employees, we're told, are richly compensated and have gold-plated benefits. And if we don't cut their wages, slash their benefits and destroy their pensions, states and municipalities across the country will be forced into bankruptcy.

Large numbers of Wisconsin residents have stood up to the attacks on public-sector workers
Large numbers of Wisconsin residents have stood up to the attacks on public-sector workers

It's all utter nonsense. There is a pension crisis, but it's not because benefits for most public-sector workers are too generous. And when it comes to deficits, the lion's share of the shortfall at the state level--by some estimates, the deficit for the 50 states will total $140 billion in 2011--is a function of tax breaks and giveaways to the wealthy and corporations, and a direct result of decreased revenues stemming from the recession.

In reality, the deficits and pension crisis are being used as an excuse to go after compensation and benefits that public-sector workers have won through their unions. The U.S. ruling class has successfully reduced the level of unionization in the private sector to single digits, and as a result, private-sector workers have worse benefits than their brethren in the public sector.

But rather than view this as an indictment of the chipping away of working-class living standards, it's being used as an excuse to double down on the attack on workers--by going after the remaining strongholds of organized labor in the U.S.

Here's a look at the myths about public-sector compensation and government deficits--and the facts you need to dispel them.


Myth Number 1: Public-sector workers are paid better compensated than private-sector workers.

The right wing never tires of trotting out figures showing that public employees are paid more than private-sector workers--one favorite statistic has public-sector employees earning 13 percent more than private-sector workers. Just last week, USA Today had a story claiming that public workers in 41 states earn higher than average pay and benefits than those in the private sector.

The big trick with all of these "studies" is that they compare apples and oranges. They don't adjust for any other factors, such as age, years of experience or level of education. Just to name one such factor, 48 percent of government workers have college degrees versus 23 percent of private sector employees--and that naturally leads to higher average compensation.

When these other factors are adjusted for, studies show that the pay of public-sector workers has actually dropped relative to private-sector employees with the same level of education. As Reich points out:

Compare apples to apples, and you'd see that over the last 15 years, the pay of public-sector workers has dropped relative to private-sector employees with the same level of education. Public-sector workers now earn 11 percent less than comparable workers in the private sector, and local workers 12 percent less. (Even if you include health and retirement benefits, government employees still earn less than their private-sector counterparts with similar educations.)

The Economic Policy Institute (EPI) reached the same conclusion--wages and salaries of state and local employees are lower than those for private-sector employees with comparable education and work experience. A Center for Economic and Policy Research (CEPR) report, meanwhile, estimates that public sector workers earn 4 percent less.

In Wisconsin specifically, the EPI estimates that state workers are under-compensated by 8.2 percent compared with private-sector workers.

When it comes to total compensation, including benefits, the data is harder to parse. But according to the CEPR, at most, the public and private sectors are equal. Their study found that "'management, professional and related' workers in the private sector receive, on average, $48.19 per hour in total compensation, almost exactly the same as the $48.15 per hour in the state-and-local sector."

And far from being "gold-plated," most pension benefits are downright modest. According to Reich, after a career with annual pay averaging less than $45,000, the typical newly retired public employee receives a pension of $19,000 a year--hardly comparable to the golden parachutes that the parasites on Wall Street enjoy.

And for about 30 percent of state and local workers, "a substantial portion of government pension expenditures only offset lost Social Security earnings," according to the CEPR, because these employees are excluded from the federal government's retirement system.


Myth Number 2: Public-sector workers contribute nothing towards their benefits and pensions.

Part of Scott Walker's approach in Wisconsin has been to claim that everyone needs to sacrifice, and all he's asking is for public-sector workers to contribute more toward their benefits and pensions. In effect, he claims that public-sector workers are getting something for nothing.

But in fact, public-sector unions have negotiated for a part of workers' compensation to go toward better benefits and pensions. They accepted lower wages in the present in exchange for having some compensation put toward health care and retirement costs. So asking them to "contribute more" is, in reality, asking them to accept a pay cut.

As journalist David Cay Johnston put it in an interview on Democracy Now!:

Americans don't seem to get this. All of your compensation is earned. It's not just your cash wage. If you work for a private employer, and you get a paid vacation, that's not a gift from your employer. You earned it...These are negotiated contracts. And how the money flows, whether it goes through the worker's paycheck and then to the pension and to the insurance company, or it goes directly to the insurance company or the pension plan, is irrelevant to the total cost...

[T]he fundamental important point here is the workers earned this. And so the governor really wants to cut their wages. And instead of saying, "I want to cut the wages of these people," he has used this false argument.


Myth Number 3: Inflated public-sector pension benefits are the cause of deficits at the state and municipal level.

Pension contributions in their entirety amount to less than 4 percent of state spending currently. The National Association of State Retirement Administrators puts the figure at 2.9 percent, while the Center for Retirement Research at Boston College puts the figure at 3.8 percent.

Overall, Robert Reich reports that taxpayers are directly responsible for only about 14 percent of public retirement benefits. The lion's share of benefits comes from contributions made by workers themselves.

And in Scott Walker's Wisconsin, the state isn't even facing the kind of fiscal crisis that plagues some other states. Walker is claiming that the state is facing a $137 million deficit this fiscal year--far smaller than many states. And a number of analysts believe Walker is inflating the shortfall--based on a Wisconsin Legislative Fiscal Bureau report that estimated the state would have ended the fiscal year with a positive balance, if not for corporate tax breaks that Walker pushed through as his first act in office.

So turning around and attacking public-sector workers is a pure bait-and-switch. Walker chose to make the deficit worse, and then use it as an excuse to go after public workers. This is the case even though total salaries and compensation in the last budget were just 8.5 percent of the entire state budget.

In addition, the Wall Street casino contributed to budget deficits in ways you never hear about. Crashing the economy in and of itself ripped gaping holes into government budgets. Overall, state and local government non-interest revenues fell from a peak of $1.48 trillion in 2008 to $1.41 trillion in 2009 and $1.43 trillion in 2010. Revenues dropped to less than 10 percent of the U.S. gross domestic product for just the third time since 1992. At the same time, state and local expenditures have decreased from a peak of $1.68 trillion in 2008 to $1.63 trillion in 2009 and $1.62 trillion in 2010.

A new International Monetary Fund study concluded that half of the increases in budget deficits around the world are due to collapsing tax revenues--and a further large share is due to interest payments on old debt. Less than 10 percent is due to discretionary public spending.

As is always the case in an economic slump, the recession--which brought with it wealth destruction, high rates of unemployment and increased reliance on social programs--caused a decline in revenues and increased spending on some services.

In addition, bad financial advice also hurt municipalities. In August, the New York Times reported how a credit deal negotiated by JPMorgan Chase that went bad has left the Denver school system paying much more in interest and fees than it originally anticipated--and potentially facing a $81 million termination fee, which is equal to 19 percent of its annual payroll.

The Denver schools aren't alone. According to estimates by the Service Employees International Union, over a two-year period, state and local governments paid banks $28 billion to get out of credit deals gone bad.


Myth Number 4: Public-sector benefits pensions shortfalls are the result of pensions being too generous.

The shortfalls in public-sector pension funds currently amount to about $1 trillion, according to a Pew Center on the States study--as of the end of fiscal year 2008, states had $2.35 trillion set aside to pay for workers' retirement benefits, and they owed $3.35 trillion in total benefits.

This is another statistic that gets thrown around a lot. But what's rarely pointed out about that figure is the timeframe for the shortfall. As Dean Baker points out in a CEPR paper, "The total shortfall for the pension funds is less than 0.2 percent of projected gross state product over the next 30 years for most states. Even in the cases of states with the largest shortfalls, the gap is less than 0.5 percent of projected state product."

In fact, if there were no contributions to any state pension funds at all, on average, with the assets on hand, state pension plans would be able to pay out benefits at their current level for 13 years.

And while it is true that there is a $1 trillion shortfall in pensions over the long term, the real question is how that shortfall came about. There are two main reasons--and neither has anything to do with payouts from the system.

By far, the single biggest contributor to the shortfall was the stock market crash from 2007 to 2009. According to Dean Baker, "If pension funds had earned returns just equal to the interest rate on 30-year Treasury bonds in the three years since 2007, their assets would be more than $850 billion greater than they are today."

Further, Baker points out that another $80 billion is a result of states cutting back on contributions to pension funds as a result of the downturn. States also cut back on mandated contributions based on making assumptions that the investment returns of the funds themselves would more than cover the contributions. When the exact opposite occurred, a massive shortfall emerged seemingly overnight.

That process has been exacerbated now by some states deliberately underfunding pensions. For example, in New Jersey, where the state has a $53.9 billion unfunded pension liability, Gov. Chris Christie skipped the state's required $3.1 billion payment last year.


Myth Number 5: The corporate tax rate is too high.

Another favorite tactic of the right wing is to point at the corporate tax rate of 35 percent and complain that the U.S. is making itself uncompetitive globally by slapping businesses with onerous rates of taxation. Moreover, governors often claim that raising taxes on corporations or the wealthy in their state will only serve to push companies to relocate. As a result, businesses are being given a free pass.

But corporations have found plenty of ways to evade paying taxes--sometimes entirely. According to left-wing economist Rick Wolff, in New York state:

In 2010, personal income taxes raised $34.8 billion; sales and excise taxes raised $12.2 billion; and corporate and business profits taxes raised $6.6 billion. Not only do businesses pay a very small portion of the state's total tax take, but business taxes rose less than the other two kinds over the last decade. From 2000 to 2010, personal income taxes rose 50 percent, sales and excise taxes rose 24 percent, and corporate and business taxes rose the least, 20 percent.

Overall, a study by three academic accountants at Duke, the Massachusetts Institute of Technology and the University of North Carolina found that corporations, on average, pay a total rate of taxation--combining federal, state and local taxes--of less than 30 percent. And more than one-quarter of firms paid an effective tax rate of less than 20 percent.

General Electric, for example, had an effective tax rate of just 14.3 percent in the last five years, according to a recent New York Times report. The same report showed that in the same time period, Boeing paid a total tax rate of 4.5 percent, Yahoo paid 7 percent, and Southwest Airlines paid 6.3 percent.

According to Wolff, "Corporations repeated at the state and local levels what they accomplished federally. According to the U.S. Census Bureau, corporations paid taxes on their profits to states and localities totaling $24.7 billion in 1988, while individuals then paid income taxes of $90 billion. However, by 2009, while corporate tax payments had roughly doubled (to $49.1 billion), individual income taxes had more than tripled (to $290 billion)."


Myth Number 6: States and municipalities are broke, so there is no other choice but to cut.

The $140 billion in state budget shortfalls is a drop in the bucket compared to the resources that were lined up when the financial system was in crisis. All told, more than $14 trillion in loans, bailouts and guarantees was put at Wall Street's disposal. States need 1 percent of that amount to wipe out their collective deficits completely.

Moreover, when the financial system was in crisis, the Federal Reserve Bank transferred about $1.5 trillion in bad debts from banks onto its balance sheet--an increase of nearly three times from $800 billion to $2.25 trillion.

Meanwhile, the Fed continues to lend money to Wall Street at interest rates of 0 percent. So why couldn't the same deal be extended to states and municipalities?

As of the end of 2009, the total net worth of U.S. households was $54.2 trillion, of which 87 percent is concentrated in the richest 25 percent of households--down from a record of $65 trillion in 2007, but still nothing to sneeze at. Meanwhile, non-financial corporations are sitting on an estimated $2 trillion in cash-on-hand, an all-time record. That works out to $7,000 of cash for every man, woman and child in the country--sitting unused in the bank accounts of big business. And those figures don't include the money locked away in private equity funds, hedge funds, investment banks and other kinds of institutional investments.

So why can't some of this wealth be taxed to help out the state governments claiming poverty?


Myth Number 7: The demands for reduced public-sector workers' wages and pensions is about "shared sacrifice"--everyone needs to cut back.

Conservative economic commentators and politicians alike hammer relentlessly at the idea that the country is "broke," and it's only fair that public workers should chip in.

But apparently, shared sacrifice doesn't apply to Wall Street executives. Back in 2008, when George Bush's Treasury Secretary Hank Paulson was trying to sell Congress on approving the the $700 billion Wall Street bailout program, he argued vociferously that limiting executive compensation would be "impractical."

As Andrew Ross Sorkin wrote in Too Big To Fail, Paulson said that banks "would have to renegotiate all of their compensation agreements, a process that could take months, preventing them from accessing the program. As one of Paulson's deputies, Neel Kashkari, claimed, "It's impossible for us to go to hundreds of banks across the country and have them renegotiate all their employment contracts...It's just going to take too long; it's impossible. So if they have golden parachutes, physically, we can't do it."

Yet three years later, what was supposedly impossible to accomplish on Wall Street is being demanded of government workers in virtually every state and city in the country.

The bankers won their battle to retain huge compensation packages by claiming that it was "unrealistic" to rip up previous agreements. Yet when it comes to public-sector workers--who earn a fraction of what the banksters do--we learn that renegotiating salaries and benefits is the only realistic option.

In the end, what these myths and facts make clear is that the attack on public-sector workers is the latest facet of an assault against the U.S. working class. We should reject the attempts to pit private-sector workers against public-sector workers--and insist that insofar as deficits need to be funded, the rich should be made to pay first.

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