Public versus private

The threat by Scott Walker, the governor of Wisconsin in the US, to end collective bargaining arrangements with public sector workers in that state is nastiest move yet by the ‘free market’ Republicans as a response to the slump in US capitalism.  The governor is trying to portray the very victims of the banking collapse and the subsequent Great Recession as the villains.  For him, the crisis was not the fault of reckless bankers, a corrupt financial sector and their grotesquely overpaid executives, but the fault of teachers, health workers, refuse cleaners and other public servants who are paid too much!

The governor not only wants public sector workers to take huge cuts in their pay and conditions but also to lose their rights even to negotiate with their employers.  In a policy designed to divide workers in the private sector from those working in the public sector, he deliberately excludes the police and firefighters from his draconian laws.  He knows there is too much sympathy for them.  But he gambles that other public sector workers will be seen as ‘fat cats’ who are paid more and have better conditions than workers in the private sector and so should ‘suffer more’ under these programmes of ‘fiscal austerity’.

In reality of course, the governor is not trying to ‘save money’ or get public sector workers to ‘pay their share’ with this move, he just wants to break the last bastion of trade unionism in the US, the public sector, which has 36% of workers in a union compared to under 10% in the private sector.

The claim that public sector workers have better pay and conditions (particularly pensions) in the US or the UK is a myth.  It is a myth perpetuated for the purpose of breaking the opposition of employees to the cuts in employment and wages that the politicians of US states, the federal government and for that matter, the UK government are now imposing.

There is a range of studies that show public sector wages in the US are simply higher than wages in the private sector because there are more skilled jobs in the former that require more qualifications, like teaching.  By including the wages of young people working in McDonalds or Starbucks or as immigrants as office cleaners and the unskilled in WalMart, the average for private sector pay will be lower than a teacher’s salary.  A fairer measure of apples and apples would be to compare the salary of a lecturer in a state university against an economist or scientist working in bank or pharma company.  Then the story is very different.

And as for pensions, sure we can find examples of highly paid public sector workers with huge pension entitlements.  But that is the same story for bankers and senior executives in big corporations.   In the UK, we know about the large salaries and pension pots that the top chief executives in local governments, various semi-government agencies or quangos and some health service managers, school head teachers and civil servants ‘earn’.

But they do not reflect the reality for the vast majority of public sector workers. Indeed, public sector pensions in the UK are the lowest relative to earnings in the OECD!   The replacement rate (value of pension payout to income) is just 31% in Britain compared 39% in the US and 59% for the OECD as a whole.   The average pension payment in local government is just £4000 a year, in the civil service it is £6000 a year and in the NHS, £7000 a year.  The average across all public sector schemes is just £6200 a year.  And the average public sector pensioner receives only slightly more than minimum income standard in retirement, according to the Joseph Rowntree Foundation.

And public pension schemes are not more generous than private ones.  The average payout in public pension schemes was 33% of pensionable pay while it was 32% in private sector schemes.  The total contributions in public pension schemes from employers and employees was about 21% of pensionable pay, the same as in the private sector.  Indeed, contributions are much higher in the fire, police and armed forces.  Already raising the pensionable age and moving from ‘final salary to career average’ payouts has reduced the value of public sector pensions by 25%!  Firefighters have seen the value of their pension payouts fall from 35% of pay to 24%.

Yet, the government and their ‘experts’ say that public pension schemes are becoming too costly and must be reduced.  The argument is that, as they are ‘unfunded’ i.e. not invested in financial markets, so the taxpayer has to make up the difference in costs after employee and employer contributions.  The cost to the taxpayer is forecast by the UK government to rise from £4bn a year now to £10bn by 2016.

But the main reason for this growing deficit is not because public sector pensioners are paid too much or public sector workers contribute too little.  It is because 3m employees have left the public sector since 1991 due to privatisation and cuts in services, a fall of 45%.  With the coalition’s pay freeze and planned further reductions in the public sector workforce, pension contributions will fall further behind the growth in the cost of the pension payouts.  Indeed 44% of the rise in the gap to 2016 is due to this.  Just a 15% increase in the number of public sector workers (rather than a reduction) contributing to the schemes would close that gap.

The UK spends just 5.7% of GDP on pensions (state, public and private) compared with 7.2% in the OECD.  And yet we have 27% of the UK working population aged over 65 compared to 24% in the OECD.  Britain’s pensioners have the fourth-highest level of poverty in Europe, worse off even than Romanian and Polish pensioners in relative poverty terms.  Nearly one in three British pensioners are ‘at risk of poverty’ compared with just 19% for the EU average.

And now we have found out that because the UK’s national statistics office got its sums wrong, the UK inflation rate has been underestimated for over ten years, thus reducing the indexed payments to pensioners in the public sector.  On top of that, the government is going further by making these payments benchmarked against the consumer price index, which is much lower than the older retail price index that includes the cost of mortgages.  So pensions will lag behind prices even more.

The UK government is introducing a compulsory contribution scheme on all employees (private and public) of 4% of pay.  This will be given over to private pension fund managers to invest.  But it was the financial crisis that was the main cause of the growing deficits in public (and private) pension schemes.  The financial collapse led to losses or lower returns in ‘funded’ schemes that are invested heavily in the stock market.  Of Britain’s private and public sector ‘funded’ schemes, 60% are invested in the stock market compared with only 36% in the OECD average.  This is what has ruined funded schemes: their returns depend on the vagaries of the stock and bond markets.

Moreover, unfunded schemes (paid for out of general taxation) are much cheaper to administer than funded schemes, public or private.  In the private sector, it costs £41-47 per member per year to administer a scheme (ie pay fees to managers). In unfunded public schemes, it is as low as £7 a member.  Because local government schemes are invested through pension fund managers too, they cost £360m a year in fees.

And then there is the state pension.  There is no need to raise the retirement age, reduce the value of pensions or raise contributions, if the UK or US economy grew fast enough to meet the rise in the numbers of older people.  For example, if the growth rate of UK economy’s productivity per worker were raised by 1% pt a year from its current level, that would deliver enough pension contributions to allow for a 50% rise in the state pension without raising its cost as a share of GDP.

Even the recent Turner report on UK pensions admitted that the cheapest, most equitable and effective pension scheme would be a universal taxation-funded state pension for all without means testing and doing away with costly private pension fund managers. In contrast, under the ‘free market’ nothing comes as a right, as the public sector workers in Wisconsin are finding.  It only comes through the vagaries of supply and demand.  Advocating the right to negotiate or the right to a decent pension encroaches on the mechanism of the market.   It is the market that stops workers in the private and public sectors gaining decent wages, conditions and pensions.  Losing the right to negotiate will hurt private sector workers as much as public sector employees.

3 Responses to “Public versus private”

  1. Pensions – Public vs Private « Labour Fight Says:

    […] Michael Roberts scotches the myths here: https://thenextrecession.wordpress.com/2011/02/27/public-versus-private/ […]

  2. BrianJay Says:

    Michael. You once stated that the monetarists had a point about Keynes in that it leads to ‘so much oil in the gearbox that it stops the wheels turning.’ The real battle that is beginning to be fought is over the size of the public sector. Nowadays that sector consumes 53% of GDP and even with the ‘cuts’ is increasing due to borrowings.

    You state that ‘if the UK or US economy grew fast enough to meet the rise in the numbers of older people.’ The only economies that are doing that are China and India and to a certain extent the other members of BRIC. As before in the 60’s and 70’s every politician would spout that we are all ‘Keynsians now’ nowadays the canarde is they all belive as Waxman put it ‘Warming of the climate system is unequivocal.’ He could have added that the warming is induced by anthropomorphic influence to conform to the creed. Whatever. But this canarde is now the cause celebre of the bureaucratic elite whose aim is to control all aspects of
    our lives and whose ‘research’ in the four corners of the earth has consumed umpteen billions of dollars. It reminds me of the state of Indiana and lately of Alabama who have tried to reinstate the value of PI as 3!. The EU elite have, in the recently in the guise of Jill Duggab the European Commission’s Directorate General of Climate Action the EC’s National Expert on Carbon Markets and Climate Change admitted that she does not know anything about her brief. Specifically when asked how much it was going to cost – to the nearest billion euro – to reduce Europe’s emissions by 20% she did not know. The target thanks to the coalition is now 30%. And as a corollary neither did she know by how much it reduce Europe’s temperature by. Would you buy a used car from these people?

    All you have to do is look at the satellite temperature data and find that far from being the 2degree temperature rise predicted by Hasen of GISS the temperature within the margin of temperature measurement, been stable for the past 32 years. In fact the worlds thermometer is lower than Hansens Scenario C, which assumed no increase in emissions from 1998. So a success then.

    Now we add in the slight hypocrisy by some (M. Brooks) in response to an article I wrote in Marxist.com. “We have to have a new form of growth” – to which my reply – not published was ‘So no mobile phones and plasma TV’s then. They, and this is a broad brush, do not want people to find the true cost benefit analysis, nor the ‘social science’ on which it is based. That would defeat the aims of the bureaucracy which is to micro manage the lives of their citizens for the greater good. Good grief you even have the Head of the National Grid stating that ‘We will have to become used to using electricity only when it’s available’ from the sky whirlygigs no doubt. They are even planning the installation of smart meters that will turn off our demand when we need it. And this is the land that Aneurin Bevan said of ‘This island is made mainly of coal and surrounded by fish. Only an organizing genius could produce a shortage of coal and fish at the same time.” And now we have them in spades by a bureaucratic dictate. One other quote from Aneurin worth quoting is that “Freedom is the by-product of economic surplus.”

    The whole purpose of the Anthropomorphic Global Warming alarmism rests on two axioms.
    1)That the world is going to run out of resources.
    2)It is the best method of achieving global governance.

    The first is a typical Malthusian construct, and allows genocide as a policy option. Genetically modified food must be demonised despite the fact that we have been importing genetically modified food since Adam was a boy and that a biofuel revolution is imperative despite the fact that even Hilary Clinton has remarked that such a policy is the base cause of food riots in half the countries of the world.

    The objective in all these policies is to force us to consume less. And global governance is the necessary tool for achieving this. This was admitted by Valery Giscard D’Estaing at the Rio Summit in 1972.

    The reason behind this attack on Public Service is that it has become out of control – seeking more and more powers for the bureaucracy, that it is endangering Capitalism itself. Something that you touched on in an earlier existence regarding Inflation.

    And now we turn to other battles against the bureaucracy. (Not mentioning in passing the riot of 600 people against the courts at Birkenhead – a fact not mentioned in ‘The Socialist’. The struggle of the PSUV against the bureaucracy in Venezuela. I have always suspected Chavez was not all that he is portrayed in Socialist Appeal. The statement today by the Hands off Venezuela on the links between Chavez and Gaddafi is really poor. It smacks of the same hypocrisy of T. Blair and Co on their links to Gaddafi when the links between Chavez and Gaddafi are well documented thanks to Al Jazeera. Caudillo Chavez, you may recall, was the recipient of the coveted Gaddafi International Human Rights Prize for 2004. We have a good idea now of Gaddafi’s understanding of “human rights.” Do we have the same for another battleing the bureacracy?

    There is a struggle going on in the US against an overbearing bureacracy – Wisconsin is part of that. I’m now a firm believer in a Libertarian point of view. A cross distinction I know was picked up by Bakunin in his criticism of Marx to put it in a 21century context.

  3. steve Says:

    Obama has agreed to a two year wage and salary freeze for all federal employees which will save the federal government about $28 billion over the next five years. A quick accounting shows that the annual savings from this measure to be well under $5.5 billion. Considering that most federal budgets are close to $3 trillion a year, calling the $5 billion annual savings a fart in the wind is a real understatement. Even the USA Today article that carred the story attributed the measure more to newly rising GOP Congressional power than to a genuine search for fiscal relief.

    Let’s be clear, however. Most federal employees won’t starve as a result. But to lower the admittedly decent standard of living of the roughtly 1.9 million US federal employees and their families to appease hoards of mindless GOP fanatics is unacceptable. It sends the wrong message that the GOP’s ongoing campaign of unprecedented fiscal hysteria is justified. It is not. It certainly isn’t justified regarding the issue of federal salaries.

    We live by myths. One of the ones by which we live by is that US federal employees are “overpaid” by the standards of similar occupations in the private sector. A closer examination show this to be false. A USA Today piece from March of this year uses Bureau of Labor Statistics data to examine a mix of comparable, mostly white collar jobs in the public sector at the federal level and the private sector and discovers that there is an average discrepancy of just over $6,000/year in favor of the federal employee. The Report opens by saying;

    “Overall, federal workers earned an average salary of $67,691 in 2008 for occupations that exist both in government and the private sector, according to Bureau of Labor Statistics data. The average pay for the same mix of jobs in the private sector was $60,046 in 2008, the most recent data available.”

    This is a far cry from the often heard claims from the far right that federal pay averages double for comparable jobs in the private sector. A chart used in the USA Today article using the most updated BLS data, which stems from 2008, even shows nine occupations with modestly to significantly higher annual pay for the private sector employee! This is astounding considering the fact that federal employees tend on average to be much more educated than their private sector counterparts. According to one study, in 2008 about 42% of federal employees completed a college degree vs. only 28% for private sector employees. They’re also older and more experienced. This should put any pay discrepancies favoring federal employees in a very different perspective.

    An updated report from the BLS actually now puts federal pay at about well below that of comparable private sector jobs. According to a recent Washington Post article;

    “Official numbers released by the government late last week show salaries of federal workers falling slightly farther behind their private-sector counterparts in the last year, by an average of 2.1 percent across the country”

    The issue is doubtless complex. Many public employees feel that the GOP/Teabagger crowd is unfairly scapegoating them for the growing federal deficit. Despite all the complaining about federal salaries, most agree attacking the growing number of federal government jobs and “high” federal salaries is not an effective way to save money. Some experts on federal employment say measures such as the one that Obama has recently proposed can be self defeating. NYU professor Paul Light told an NPR reporter that cutting federal salaries or jobs has been tried before and doesn’t usually save much money. Light claimed during an interview that such measures may end up actually costing taxpayers even more. He explained that the reason is…

    “Largely because the jobs migrate to contractors or the jobs are eventually filled in other ways…It’s not a way to save money. It is a way, if done well, to improve government performance. But that may involve significant injections of new money for things like better technology, better training and so forth.”

    It does certainly appear that this issue is more political than fiscal or economic in nature. Some have said in this regard that federal employees are the “new welfare queens.” The analogy is apt when describing the shift in scapegoating targets by the far right. Furthermore, one study asserts that, “In 2008, pension contributions amounted to about 3.8 percent of total state and local budgets.”

    http://crr.bc.edu/images/stories/Briefs/slp_13.pdf

    In addition, most benefits are paid mostly out of returns on investment of pension funds to which public employees are making bigger and bigger contributions, not state tax revenues.

    http://www.cepr.net/index.php/blogs/cepr-blog/returns-on-public-pensions-what-rates-should-we-assume

    If Obama wants to lower the deficit he should turn his attention away from federal employee salaries and toward better ways of stimulating faster economic growth. Cutting public worker pensions won’t help control state deficits and probably worsen them.

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