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Reality Check Needed for Public Employee Comparison

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By Lowell L. Kalapa
(Released on 7/5/09)

There were a number of comments to last week’s commentary which ended on a note that compared public and private sector compensation. While public sector employees like to believe that they are paid substantially less than their private sector counterparts, that depends on which position one is comparing.

Generally, the hourly workers at the state and county governments make more than their counterparts in the private sector. In a comparison of 45 hourly positions where the duties were identical, the average wages for 32 (71.1%) of the public sector positions were higher.

Salaried employees who have been at their careers for some time are usually paid better in the private sector than their counterparts in the public sector as private employers recognize the need to attract and retain more highly skilled workers who are in short supply. In the public sector, because the civil service pay scale is subject to negotiation and is highly dependent on the longevity of the employee, those in higher paying positions tend to see increases in their salaries rise more slowly than their counterparts in the private sector.

Much of the wage and salary differentials are overshadowed by the differences in benefits afforded public sector employees. Probably the most generous benefits for active employees are the vacation and sick leave benefits. After a probationary period, which usually applies to both private and public sector employees, public sector employees earn 21 days of vacation and 21 days of paid sick leave per year. And in general, those days can be carried over from year to year without limitation.

For employees in the private sector, vacation and sick leave benefits tend to be much more lean. For example, one company grants their employees one week or five working days of vacation each year for their first three years of employment, two weeks for service between four and ten years and three weeks for service in excess of ten years. Because private sector employers view vacation days not used as an unfunded liability, they usually limit the number of days that can be carried over from year to year to 10 working days.

This is because vacation days accrued over time and taken at a later date are compensated at the employee’s current salary or wage level, so allowing the employee to accrue a whole bunch of unused vacation days could have a substantial financial impact on the business.

The same is true of sick leave days. In the private sector, employees usually earn one sick day per month for a total of 12 paid sick leave days per year. Like vacation time earned, private sector employees are usually permitted to carry over only a limited number of unused sick days.

Between 21 days of vacation and 21 days of paid sick leave, we are talking about the potential for a public sector employee to take just over two months off from work and still be paid. In other words, we, as taxpayers, are paying public sector employees to work just under ten months per year.

And while public sector employees are not subject to Hawaii’s prepaid health law mandating that full-time employees are provided health care insurance while on the job, that does not carry over for private sector employees when they retire. On the other hand, while private sector employees have to pick up the cost of their health care insurance after retiring, public sector employees do not. And until recently, the public sector employee retirees were not only covered after their retirement, but that coverage was also extended to their spouse whether or not the spouse ever worked for the state or county government. While some of the health benefits were curtailed, there are currently thousands of public sector retirees who enjoy this generous benefit.

The real kicker is that while private sector retirees see their Social Security benefits reduced by the premium for Medicare once they reach age 65, the public sector employee retiree is made whole with a reimbursement from the retirement system equal to that amount of the Medicare premium.

Finally, one has to remember that the state retirement system is one of the few defined benefit retirement plans left. The private sector has largely eliminated such plans in favor of encouraging employees to save through a 401(k) plan where the deferral is sometimes matched by the employer. However, and more importantly, unlike distributions from a 401(k) plan that are subject to state income taxes, distributions from the state retirement system are not subject to state income taxes. And unlike recipients of 401(k) plans which are highly dependent on the market at the time of retirement, the state retirement benefit is solely dependent on the number of years of service and the public sector employee’s three highest years of compensation.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.

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