If you walk into a typical American public school, you’re bound to see a teacher with an impressive back-load. Stop wagging your finger; this is a column about compensation, not prurient chiding. A back-loaded compensation scheme rewards employees with significant tenure in their posts by offering a low starting wage that rises with tenure in a firm or agency, usually culminating in a generous pension system with retirees likely to make more than many of the active employees who are paying for the pension system. Virtually all government employees face a back-loaded compensation scheme, which makes it a topic worthy of considerable attention: several states and dozens of major municipalities face impending fiscal crises as a direct consequence of rising pension costs.
The first thing worth noting about the back-loading of public employee compensation is how it discourages talented workers from entering public service and encourages mediocre workers to stay put. In a modern, vibrant economy, talented individuals dynamically move from firm to firm, and even from industry to industry, in response to offers of better pay, changes in personal interests, etc. It is highly desirable to have a dynamic labor force, since transition and friction costs are lower within an economy when workers are willing and able to move from role to role seamlessly. However, dynamism is inhibited by public sector pay schemes that offer low starting salaries even for talented employees and deliver minimal benefits for those who don’t make a lifelong career out of government service.
New York City public school teachers, for instance, tend to start out with a salary between $45,000 and $55,000 plus benefits. The pay is low enough that few talented individuals would be lured away from the private sector to the classroom by the initial pay package. However, a punch-clock employee with no particular enthusiasm and unexceptional performance can take a low initial pay, rationalize it by realizing they only have to work 40 hours per week nine months out of the year and get generous vacation time during those nine months, plod along for 30 years, and find themselves making $100,000 per year. They can then retire at age 55, an age at which private sector workers can’t dream of retirement, and receive $60,000 per year in pension pay plus health benefits for the rest of their life. There is no adjustment for teacher quality or enthusiasm; all that matters is the number of years spent in the classroom. A similar pay system is used for most government jobs nationwide.
This is troubling for a number of reasons, the most obvious being the impact on public finances of public employees retiring at 55 rather than 65 or older (the private sector standard). On that front, there has been some progress: several states have started raising the minimum public employee retirement age above 55. However, an oft-ignored consequence of public employee pay schemes is the penalty they place on short-term government service, and here progress has been lacking.
Although public pensions are very generous for employees with two to four decades of service, they often pay little or even nothing to employees with fewer than ten years under their belts. Government pay is not only untied to performance, it encourages larger numbers of less enthusiastic public servants to stay on in a position they might not care about just to capture the back-loaded compensation.
As a society, we should encourage medium-term public service by enthusiastic individuals and discourage tenure-based rent-seeking. New teachers in a major city probably shouldn’t be making less than $50,000 per year, and tenured teachers definitely shouldn’t be making more than $100,000. Public employee pensions should pay a small, even annual increase based on tenure rather than disproportionately rewarding five and 10 year “landmarks.” Above all, public employee pensions should not allow government workers to retire during early middle age: 55 isn’t even considered retirement age in the French welfare state. Public employees should not be a favored special interest isolated from the competitive pressures faced by every American in the private sector.
Trevor Wagener is a senior in Pierson College.