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  • Pensions Are Deferred Compensation—a Lot of Deferred Compensation

    Last week, The Heritage Foundation released important new research on the real cost of public pensions. In response, many different public-sector advocates have offered the same, curious, fallacious argument.

    Heritage found that, in Wisconsin, for example, total pension costs are more than two-and-a-half times what government actuaries estimate. (The difference is due to government actuaries not adjusting for the possibility that pension funds will fail to hit their target rates of return.) Excessive pension costs help to push total compensation for Wisconsin public workers ahead of comparable private workers in the state, even after the reforms signed by Governor Scott Walker (R).

    Many critics have responded in a way that goes something like this:

    1. Pensions are just deferred compensation, like wages that public workers choose not to collect until they retire.
    2. Therefore, pensions are not paid for by taxpayers.

    The premise (1) of this argument is correct. Pension benefits certainly are deferred compensation—a lot of deferred compensation, in fact. The implication (2), however, is clearly wrong. All compensation received by public employees, deferred or not, is by definition paid for by taxpayers. The generosity of pensions should be subject to as much public scrutiny as wages, health insurance, or any other form of employee compensation.

    The confusion seems to originate from an article by journalist David Cay Johnston. Johnston presumably does understand that public pension benefits, like all other forms of compensation, ultimately come from taxpayers. His point is limited to the political rhetoric and issue-framing around pension costs.

    Johnston objects to Walker saying, in effect, that public employees should contribute more to their pension plans.Johnstonbelieves this is misleading. He seems to prefer that Walker and others say something like “We should reduce the compensation of public workers.”

    Johnston believes that speaking of public employees “contributing” to their pension plans makes pensions sound like some kind of bonus or gift on top of regular compensation. In reality, as he points out, pensions are part of compensation.

    As noted above,Johnstonis certainly correct that pensions are deferred compensation. His complaint about rhetoric seems misplaced, however. It is hard to believe that voters do not interpret “contribute more to their pension plans” as a reduction in compensation for public workers. How could it be anything else? And Walker’s focus on the pension portion of compensation seems entirely justifiable based on the fact that this is the portion most out of line with private-sector levels.

    Whatever one thinks of Johnston’s point about rhetoric, however, his argument does not imply that pension compensation is somehow free to taxpayers or that pension generosity should be off-limits to budget cutters. Total compensation for public workers in many states is higher than that of comparable private-sector workers, and all forms of that compensation—deferred or not—should be carefully evaluated by taxpayers.

    Posted in Economics [slideshow_deploy]

    6 Responses to Pensions Are Deferred Compensation—a Lot of Deferred Compensation

    1. Bobbie says:

      If this is the new America where it's government takes whatever it wants putting people at their feet while stealing earned income to feed themselves, the people are left without defense. How dare the unconstitutional work of government intentionally dump sacrifice on the people while protecting themselves above the people! Government with dignity takes the hit without slamming the people they govern…
      with free people came government greed!

    2. saveamerica says:

      The sign reads: "protect our public services?" Why, when some "public" services were stolen from the private sector and other public services are competing against the private sector? "Protect our public services" where the country of free people are forced to pay government control over their personal freedom of choice to do business with the dignified, self governed… what satanists…

    3. David Cay Johnston says:

      Mr. Richwine,

      In your nuanced post your write that I presumably understand that state worker pensions "ultimately come from taxpayers. His point is limited to the political rhetoric and issue-framing around pension costs."

      I am afraid you contribute to the popular misunderstanding of the issue despite your efforts here.

      First, not all state worker compensation comes from taxes, as my column showed and as a review of detailed government budgets will show you.

      Second, the taxpayers were compensated by the labor of the workers and the workers were compensated with their pay and fringe benefits. From nearly five decades of reporting I can assure you that many people think government employees get something they did not earn when they receive pensions because they do not understand market economics, for which journalists bear some blame.

      I also did not assert that workers should get their current compensation, more money or less. I wrote (emphasis added):

      " How the compensation packages of state workers get divided up is NOT a matter of tax burdens. Only HOW MUCH the state workers get paid is a matter of tax burdens…. That is not to say that the state workers make too much or too little. It is to say that journalists as a class are fundamentally getting the facts wrong…"

      My column was aimed squarely at my fellow journalists. Few reporters and editors are grounded in economics, public administration, and compensation and thus, unintentionally, contribute to misunderstanding.

      The focus of my column was on how my fellow journalists, by failing to check the facts and assuming statements by Gov. Walker were factual, bought into his assumptions, which were not grounded in economics, compensation or law.

      Reporters should never assume the factual basis of any statement. I also showed how journalists could avoid such errors by following two rules, wrtiting:

      "Rule One: Check it out. Be so skeptical that if your mother says she loves you, check it out.

      "Rule Two: Cross check again and again until you not only know the facts, but can put them in proper context and understand all sides so well that their perspective gets proper weight and lecture, or as I like to say, everyone recognizes their oar in the water.

      "Deadlines may make Rule Two difficult, and often impossible, in writing the first rough draft of history. We are now in the umpteenth draft and the initial mistake keeps getting repeated, as so often happens when a big story brings a herd, until it becomes accepted as unassailable truth.

      "The reason that falsehoods are transformed into the public' s common knowledge via inaccurate reporting is simple. When editors or producers back home get an account that differs from what the news herd says they raise questions and often delete unique and accurate insights. But if a reporter just repeats what everyone else is saying it usually sails unchallenged to print or airtime even when it is untrue."

      My column (for my former employer) is available at http://www.tax.com/taxcom/taxblog.nsf/permalink/u

      David Cay Johnston

      • Bobbie says:

        if it's going to government employees it's coming out of tax payers pockets no matter how you want to cover it up. If there was any decency there wouldn't be game playing with tax payers money and behind our backs! Try to grow up, the government's job is to the people, not unions who work against them by bullying threats of violence and intimidation…

        • Pragmatic says:

          He's not standing up for the unions. He's trying to clear the air and provide clarity to this issue (which is much needed as both the left and the right distort the true to fit their talking points).

          He also wrote a well-argued post with references and reasoning. If anyone is immature it is you for telling him to "grow up".

          • Bobbie says:

            Where did that come from? "He's not standing up for the unions?" Pragmatic, are you of the easily offended that can't face truth? Or comprehend words written in the sense it's written? What I wrote is true what you write is immature…

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