Andrew Biggs Archives - The Pursuit of Happiness

The Congressional Budget Office, the federal government’s numbers cruncher, recently completed an analysis comparing salaries and benefits received by employees of federal and large private-sector employers, and concluded that all things being equal, the federal government pays better wages than the private sector.

On average, the federal government’s compensation package pays a 17 percent premium over the private sector.

The analysis, called “highly professional” and “state-of-the art” by former Social Security Administration Deputy Commissioner Andrew Biggs, is an attempt to do an apples-to-apples comparison by taking into account levels of education and experience.

All-in compensation per full-time equivalent federal employee in 2015 was about $123,000. Assuming a 17 percent federal pay premium, this implies that on average a similar private-sector employee would receive total pay and benefits of about $105,000, an annual difference of about $18,000. …

When averaged over 2.1 million federal employees, the federal compensation premium adds up to real money. Total federal compensation last year was close to $260 billion. A 17 percent difference is about $38 billion per year, equal to what the federal government spends on energy and the environment and substantially exceeding federal spending on transportation.

The CBO report found that 91 percent of federal employees have an education ranging from high school graduate to master’s degree, and that these employees make more than those of equivalent educations at similar jobs in the private sector. The report found, however, that the 9 percent of the federal workforce that have doctoral level degrees make 18 percent less than those with equivalent degrees in the private sector.

Biggs says that the difference in the type of grades, alma maters, and fields of study have not been measured so there’s no way to know whether federal workers are more “middle of the road” students from average colleges compared to those Ivy Leaguers with top grades. He suggests that this lack of information may be where the weakness in the report lies and it could be a notable variable since “most private-sector employers could not attract and retain employees while paying 18 percent less than their competitors.”

Doubling back, however, Biggs then says that the federal pay premium could be hurting innovation because workers who choose to make more money in government than work in the private sector are squandering their potential creative energies.

As the CBO report shows, for less-educated workers federal pay is more than 50 percent higher than private-sector levels. This makes it almost impossible for an employer of less-educated workers to compete and, as a result, the best of that group — employees with the greatest drive, imagination, and leadership — may find themselves employed in government rather than the private sector, where they might make a larger impact on their communities. …

There are many highly-educated, highly skilled, highly-motivated Americans working for the federal government doing important jobs. But we shouldn’t miss the risk that generous federal pay could mean the founders of the next Google or Tesla find themselves working in a federal office building instead of creating the innovations that can change the world.

But perhaps the well-paid average government worker of a decent education isn’t missing his calling. A recently released study that tracked 81 high school valedictorians through their careers found that the best and the brightest often end up in great jobs but ones that lack creativity. The suggestion is that the early track toward professional success pushes these highly motivated students to avoid risk-taking. They do not pursue eminence in one particular field nor devote themselves to a single passion.

“They obey rules, work hard, and like learning, but they’re not the mold breakers. … They work best within the system and aren’t likely to change it.”

In other words, dropouts like Bill Gates, Steve Jobs, and Mark Zuckerberg are unlikely to be interested in government careers in the first place.

Ultimately, the federal government’s high pay does have side effects. It skews the pay scale and impacts the labor market, making it harder for companies to compete for bright employees. However, if the goal is to populate the federal government with good-quality workers, financial benefits are a solid offer to attract them.

When you wonder whether the 401(k) revolution was a mistake, you have to first ask yourself, what was the 401(k) revolution? That was the move beginning in the late 1970s from defined benefit plans to an employer-sponsored retirement savings that allows workers to save and invest pre-tax payments and pay taxes when they withdraw the money after retirement.

In 2017, people under age 50 are allowed to set aside $18,000 of their income in 401(ks)s while people 50 and over can add another $6,000 annually. Employers often match a percentage of the contribution employees make, and the money goes into market products that compound over time.

And boy do they. The average 401(k), which obviously grows in later years when people earn more, was around $120,000 last year, and those participating in a 401k for at least 10 years have average balances of $251,600.

Yet, the creators of the 401(K) lamented to The Wall Street Journal this week that they were not happy with the way the whole thing turned out. They didn’t want it to be so successful, apparently, because they wanted 401(k)s to supplement traditional pensions not replace them, and they decried the fees associated with investing in an uncertain stock market while people are also living longer.

Given that more people are now invested in their own retirement plans than ever before — 61 percent today compared to 45 percent when pension participation peaked in the 1970s — and that these plans are turning around benefits at high rates — since 1984, inflation-adjusted benefits per retiree have nearly tripled — the question to ask is why is this considered failure?

Former Social Security official Andrew Biggs always offers the deep dive on how to count the money. And his analysis suggests all the hand-wringing about retirement savings is a bit overwrought.

The Journal article features a nice chart – under the headline “Savings Struggle” – showing a declining U.S. personal saving rate since 1970. Some might take that falling saving rate as denoting that workers are putting away less money for retirement. Actually, not. The reason is that the total personal saving rate also includes the amounts that retirees are drawing down from their savings (or DIS-saving) , which lowers the saving rate.

And guess what? There are more retirees today than in the 1970s – one-third more, relative to the working-age population. As I’ve pointed out, the total personal saving rate says very little about retirement saving adequacy because, over a person’s full lifetime, their personal saving rate should be zero.

So what are we to do? Start by trying to figure out how much working-age Americans are saving for retirement and whether that amount has gone up or down. … In 1975 – the peak year for traditional pension participation, for those playing along at home – total pension contributions equaled about 5.8% of wages, while by 2013 contributions has risen to 8.3% of wages. That’s a 43% increase in the amount that’s getting set aside in retirement plans, even after accounting for the growth of incomes.

Or we can look to the Consumer Expenditure Survey, which tracks how much households contribute to retirement plans from their own incomes, a figure that excludes employer contributions. The survey aggregates Social Security and pension contributions together, so I pulled out the Social Security payroll tax which rose slightly from 1984 to today. Despite the increase in payroll taxes, household pension plan contributions rose from 2.7 to 7.1% of incomes (for households aged 45 to 54, which are the prime saving years).

But maybe households are contributing more to their retirement plans only because their employers are contributing less? Um, no. The Bureau of Labor Statistics generates data going back to 1986 for employer contributions to retirement plans. While employer contributions declined from 1986 to 1989, today employer contributions are 10% above their 1986 level and 38% above the average from 1989 to 2001.

Okay, so retirement savings are increasing. But maybe it’s only the rich who are participating in 401(k)s while everyone else gets left behind. Actually, participation in retirement plans today is substantially higher than it was back when traditional DB pensions ruled the world. Statistics aren’t great, and in particular the popular Current Population Survey isn’t great at catching whether employees are offered a retirement plan and whether they participate. Instead, the Social Security Administration looked at workers’ tax records, which record whether they or their employer contributed to a retirement plan. SSA found that in 2012, 61% of all workers participated in a retirement plan. According to data gathered by EBRI, back in 1979 – before 401(k)s took root – only 45% of workers participated in a retirement plan. And the news may be even better than that: if we look at the household level and leave out the poorest households — who will and should rely almost entirely on Social Security — most are saving. In the Survey of Consumer Finances, 89% of households aged 30 to 64 with per capita earnings in excess of $20,000 have either a 401(k) or IRA-style account or some entitlement to a traditional pension benefit.

So to sum up, we’ve got more workers saving for retirement and they’re saving larger amounts. And that’s your 401(k) failure?

Biggs adds that claims of retirement incomes stagnating due to high fees or individuals’ inability to invest are wrong, and points to a study that shows that “from 1984 to 2007 annual Social Security benefits for the median household rose by 25 percent above inflation. But incomes from private pensions increased by 141 percent. That’s one hundred forty-one percent, people. Total retirement incomes for the median household rose by 58 percent above inflation from 1989 to 2007.”

Biggs acknowledges that the retirement system has some problems, but notes that the history of the 401(k) isn’t one of them.

Read Andrew Biggs’ analysis in Forbes.