Why Fed Workers Out-Earn Private Sector: Benefits

Why Fed Workers Out-Earn Private Sector: Benefits
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Carolyn North wishes she’d taken the government job sooner. Her reason? The benefits. 

“If I had stayed in the private sector, I would still be working,” said North, 70, a nurse who retired in 2013 after 12½ years with the Department of Veterans Affairs. “I’ll have great health insurance for the rest of my life,” she said. “It’s a blessing that I have those benefits.” 

A new report from the Congressional Budget Office translates that blessing into dollars and cents. While federal employees tend to receive lower salaries than their counterparts in the private sector, they enjoy far more generous benefits. As a result, the CBO reports that federal workers receive “17 percent more in total compensation.” 

For the government’s 2.2 million civilian workers, that added up to $215 billion in fiscal year 2016, an average of more than $97,000 per person in wages and benefits. In comparison, a December 2016 report from the Bureau of Labor Statistics calculated average compensation for private sector workers: $68,141 per year.

No college degree? No big deal. The CBO reports that federal employees with a high school education or less earn 53 percent more than their private sector peers. Even those federal workers with more education, up to a bachelor’s degree, receive 21 percent more in total compensation. 

It is only at the highest education levels – those with graduate degrees – that private sector workers fare better than civil servants. For this group, total private sector compensation is 18 percent higher than it is for federal employees. 

Andrew Biggs, a scholar at the American Enterprise Institute whose research has documented the “compensation premium” enjoyed by government workers, said the gap raises larger social issues. “It’s not good policy for government to pay overly generous benefits, and it’s not healthy for ordinary citizens to resent people who work for government,” Biggs said. 

The CBO report may bolster the Trump administration’s efforts to streamline government. One of its first management initiatives was to freeze most federal hiring. The aim, said White House Press Secretary Sean Spicer, was to begin reining in “unsustainable” wage and benefit costs. Although Office of Management and Budget Director Mick Mulvaney announced the lifting of that order in April, he said, “This does not mean agencies will be free to hire willy-nilly," while repeating Trump’s promise to streamline government.  

That will be a monumental task. The federal government’s pay and benefit system is incredibly complex, including variables for age, years of service, date of hire, occupation, and location. In general, however, benefits put federal employees in a different league than other workers.

Federal workers needn’t worry about finding health insurance on the troubled Affordable Care Act exchanges, where some counties struggle to offer even one provider. Government employees have access to at least 15 plans regardless of where they live, according to the Office of Personnel Management. 

Whether employees chose low premium/high deductible plans or more expensive options providing greater coverage, the federal government pays between 70-75 percent of the monthly premium, even in retirement.

Workers can also contribute up to $5,000 per year into their own version of health savings accounts. They can withdraw this money, tax free, to cover expenses not picked up by their insurance, including not just over-the-counter medicines but babysitting and summer camp fees for children under 13. 

Pension plans are also lucrative. While many workers in the 1099 or “gig” economy receive no retirement benefits, the Federal Employees Retirement System (FERS), which covers federal workers hired since 1984, combines three retirement plans into one: a basic, or defined, benefit plan, a thrift savings plan, and Social Security. 

All workers hired after 2014 are required to contribute 4.4 percent of their salary each year toward the basic benefit plan (before that it was 3.1 percent). Federal agencies contribute an additional 13.7 percent of an employee’s annual wages. In retirement, employees receive a monthly pension based on their age, years of service, and a multiplier, for the rest of their lives. 

In contrast, the Bureau of Labor Statistics 2016 Employee Benefits Survey found that only 8 percent of private sector firms offered a defined benefit program. 

Federal employees can also take advantage of the government’s version of the 401(k), the Thrift Savings Plan. Employees hired after July 1, 2013, are automatically enrolled in the program, and agencies deduct and deposit 3 percent of each paycheck into the plan. Workers can elect to contribute more than the automatic deduction, and their agencies match dollar for dollar up to 3 percent and 50 cents on the dollar at 4 and 5 percent of total salary. 

They can invest that money in a range of funds with very low fees. While equity mutual funds charge investors at least 1 percent per year – $10 per $1,000 invested – federal employees pay net fees of roughly 38 cents per $1,000 invested. But even if the employee doesn’t make any contribution to the account, the agency will still contribute 1 percent of the individual’s annual salary. 

Ary Rosenbaum, a Garden City, N.Y., attorney who specializes in federal benefits law, said the typical 401(k) match in the private sector “nets out to 3.5 percent.” 

Rosenbaum said that in 2015, only 56 percent of private sector employers offered their workers a 401(k) plan, and that 41 percent of those didn’t match employee contributions at all. 

The third leg is Social Security. Federal workers hired after 1984 who are enrolled in the FERS retirement plan also pay Social Security taxes and can receive those benefits when they retire. Before that federal workers did not pay Social Security taxes and were not eligible for those benefits.

They have long paid Medicare taxes, making them eligible for that program.

Federal workers also receive more paid leave than private sector employees. Federal workers with five years of service can receive up to 33 days of paid leave, which includes 20 vacation days and 13 sick days per year. They also get 10 paid holidays. Those 43 days work out to roughly 8½ weeks.

A 2016 analysis by Rachel Greszler of the Heritage Foundation found that private sector employees receive roughly one-third less time off: an average of 13 vacation and eight paid sick days each year, in addition to holidays, which vary considerably by employer.

Employee Assistance Programs offer free professional counseling for all federal employees coping with alcohol or drug abuse, work or family problems and job stress. The government also offers child and dependent care, including elder care, though the types of programs vary by agency.

Federal employees have powerful defenders inside and outside of government. The Federal Salary Council, which is made up of union representatives and outside compensation experts and advises the White House on federal employee pay levels, issued a 2016 report that focused on salary rather than benefits. It found that federal employees earned 34 percent less, on average, than their private sector peers. 

Tony Reardon, president of the 150,000-member National Treasury Employees Union, said efforts to portray federal benefits as too generous only tell half the story. 

He said they disregard the fact that federal employees “contribute to their retirement and their health care benefits from their wages, just like private sector workers.” He also noted that federal workers do not enjoy “stock options or deferred plans and other private sector compensation tools.” 

The Treasury employees union is seeking more benefits, including six weeks of paid parental leave and free dental and vision coverage. Reardon said critics of federal retirement benefits should instead focus how “to ensure a livable retirement for all Americans, not diminish existing retirement programs.” 

Greszler said pouring more money into benefits is counterproductive. Instead, the government should provide more compensation up front – through immediate pay instead of down-the-road retirement benefits. “It would help the government have the right people in the right government jobs at any given time,” she said, “as opposed to people who are simply marking time until retirement.” 

Other experts say discussions of federal compensation often lack context. Neil Gordon, an investigator for the Project on Government Oversight, criticized the CBO and other reports for ignoring a far more pressing issue: the rise of federal contractors. 

That’s a main reason the number of official federal employees has increased only slightly since the Kennedy administration. Referencing a 2011 study titled “Bad Business,” Gordon wrote: "We were also astonished to discover that contractors’ billing rates were, on average, 109 percent more than the total compensation paid in the private sector for comparable services."

The Cato Institute’s Chris Edwards said that while the federal compensation system is generous, it also represents “a small portion of overall federal spending.” 

“If budget cutters are looking for real savings,” Edwards said, “they need to be looking at one of the biggest items in the federal budget – entitlements.”

North, the VA retiree, emphasized federal workers’ spirit of service. “I don’t think they get too much in the way of benefits,” she said. As an Army veteran, she explained, she was eager to put the skills she earned as a Vietnam-era veteran to work helping train and serve the next generation of military caregivers.

“I was happy to see the VA putting veterans back to work and giving them an opportunity to serve once again,“ North said. “Working for the government and for the veterans was more important to me than a paycheck or a benefit package.”

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