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Pensions Are Deferred Compensation—a Lot of Deferred Compensation

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Unread 06.05.12, 11:05 AM
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Pensions Are Deferred Compensation—a Lot of Deferred Compensation

On 06.05.12 06:30 AM posted by Jason Richwine

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.

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